A Tribute to the Thoughts of Another and his Friend"Everyone knows where we have been. Let's see where we are going!" -Another

Saturday, May 7, 2011

Costata's Silver Open Forum

Listen up all you brave silver warriors. Uncle Costata has a story to tell you. In our first-ever guest post written exclusively for this blog, Costata lays it all out in stunning detail. And he invites you all to hit him back with your very best shot. Enjoy! -FOFOA

Has the silver market been cornered.... AGAIN?by Costata

This open forum has one main purpose. To place a narrative before you, a story of a market cornered, to discuss, dissect and critique. If you read on you will see that I’m not without competition in the weaving of stories about silver and the silver market.

All works of fiction require “a willing suspension of disbelief”. As Samuel Taylor Coleridge suggested, if a writer could inject "human interest and a semblance of truth" into a tall tale, the reader would suspend their skepticism concerning the implausibility of the story.

So, in order to make my narrative worthy of your indulgence I have to present a sound case that it is possible. Otherwise why would anyone “willingly suspend disbelief”? At the same time I must cast doubt on the tales of the other storytellers. You see, my story is based on a view of the silver market that is diametrically opposed to theirs. To suspend disbelief in my story requires that you disbelieve theirs entirely.

But before we proceed, I want to make something crystal clear. This is a story about a corner of the flow of silver, not the aboveground stock.

The comments are open and un-moderated. All are welcome to discuss this story and, if you wish to do so, the other storytellers offerings.

What is a corner?

I have made a few changes to the definition offered by Wikipedia in order to make it more directly applicable to physical silver. You can see their original wording here.

To “corner the market” is to control enough of a particular commodity to allow the price to be manipulated…..The corner operator hopes to gain control of enough of the flow of the commodity to be able to set the price for it.

If you are looking to corner the flow in a market one of the risks that needs to be evaluated is the possibility that any existing stockpiles could be mobilized against you. Obviously it would be very helpful if any stock was highly immobile. More on this below.

A quick review of the history of attempted market corners offers two lessons. Most attempts at a corner fail and those that were successful lasted for a short period of time. Let’s take a brief look at a recent, reportedly successful commodity market corner. Again from Wikipedia (with my edit in bold):

On July 17, 2010, Armajaro purchased 240,100 tonnes of cocoa. The buyout caused cocoa prices to rise to their highest level since 1977. The purchase was valued at £658 million and accounted for 7 per cent of annual global cocoa production. The transaction, the largest single cocoa trade in 14 years, was carried out by Armajaro Holdings, a hedge fund co-founded by Mr Anthony Ward…… This example demonstrates that 7 per cent of a perishable good is enough to allow profit taking via cornering a market provided demand is inelastic and the need for the commodity is time sensitive.

Obviously this hedgie with the sweet tooth was targeting industrial cocoa users to deliver his profit either directly or indirectly (from other speculators). Presumably the industrial users could not pull their bids and wait him out. They had to accept higher prices.

This too is a story about a corner of a physical commodity. "Paper silver" plays a part in the price manipulation strategy and in booking profits, but the corner itself is in the physical metal.

The Hunt Brothers

Let’s stroll down memory lane and revisit the Hunt brothers' silver market corner. I won’t recount that fascinating tale just now but you can read about it here.

Instead I want to focus on how it ended for the Hunts. So let’s ask someone who was there, an expert trader, the one and only Jim Sinclair. (My emphasis)

(Posted: Jan 16 2011 at jsmineset.com)"The Comex board of directors unilaterally declared their written silver contract null and void. That is exactly what occurred when the Comex went to "sellers only" on Silver at a $53 bid, offered at $55 (Yes, that was the floor spread). With no transactions accepted that were buyers and sellers orders only, it left the Comex members to make the bids. Silver simply collapsed and platinum started its $1000 daily limit moves on the downside. It was that which collapsed gold…

Position limits are a joke compared to "sellers only," meaning nothing to any commodity traded worldwide. All position limits will do is reduce the volume on US exchanges. It is so easy to get around that with non-US subsidiaries. The international non-US exchanges will celebrate this development.

Ouch! The rules are already on the CFTC books that empower them to protect the Comex members, and the exchange itself, from any would-be manipulator let alone someone operating a full blown corner. All they would need is the will to use them.

(Incidentally, many people seem to forget that Comex is not a major physical silver exchange. It’s a paper price discovery mechanism that handles less than 5 per cent of the physical silver traded annually.)

In this narrative the Comex paper silver contracts are one of the “legs” in the strategy to manipulate prices and book profits. The LBMA is also an important part of this story in both a paper and physical silver context. More on the LBMA below.

Back to the Hunts. So, the moral of the Hunts’ travails is that if you are going to include the Comex in your plans to corner a market you had better make sure the regulators aren’t going to intervene.

Regulatory capture?

Is it possible that regulators in some markets could be under the thumb of the operators they are supposed to regulate? While you ponder this question, a few links to pass the time.

When I offered a definition of a corner I mentioned that “it would be very helpful if the stock was highly immobile”. If the silver stock is immobile all the aspiring operator of the corner has to worry about is the flow of physical silver.

There is heated argument about the correct estimate for the total amount of aboveground silver. Bob Moriarty of 321gold.com weighs in here with his estimates which are similar to the conclusions of this analyst. Others argue these estimates are way too high. You will have to do your own investigation in order to decide whom to believe. As a quick 'n dirty tip, if they cannot show you their methodology, look elsewhere for information.

From my research it seems to be a safe bet that the number is in the billions of ounces when you include silverware, old silver coins, jewelry, bullion coins, small bars and ETFs. In other words, more than enough to overwhelm a corner if it flowed freely. However, most of the owners of the silver stock either hold it for its utility (use value) or they are “buy and hold” investors.

Will this silver stock flow? I hope we can agree that the answer is ‘No’ unless the price is high enough to overcome sentimental attachment or the individual owners of that silver experience a sharp decline in their income and/or standard of living. So for the purpose of this story we are assuming the bulk of the aboveground silver stock is not mobile at the present time. No immediate threat to a corner operator.

This wrap up of the World Silver Survey by Mineweb says: “Last year world silver fabrication demand grew 12.8% to 878.8 million ounces…”. According to Eric Sprott, in 2010 the total supply of mined and scrap silver amounted to 951 million ounces. We’ll take Sprott’s figure as the size of the flow that is central to this story of a market cornered.

In passing I would also like to point out that when analysts talk of “consumption” of silver they should mean “total industrial demand minus recycling”. This silver is consumed insofar as it is not financially viable to reclaim it (at present). Other holders of silver variously hoard, wear or utilize it in some way but it is not “consumed” and remains part of the aboveground stock. While the stock remains immobile, this non-consumption demand also competes for the flow with the consumers of silver – the industrial silver users.

Another issue I hope we can agree on is that silver, like a host of other commodities, has been and remains in a commodities bull market. The primary trend since 2002/2003 has been upward. Within that upward trend there has been lots of price volatility and potential profits for a savvy trader on both the up and down price movements. A corner operator could have dramatically increased their profits by accentuating the moves in both directions. The central theme of this narrative is market manipulation, not price suppression.

Silver Price Suppression

The belief in a scheme to suppress the price of silver is pervasive among silver bugs. If suppressing the price of silver was the sole objective of a silver market manipulator then my narrative collapses. (You will see why shortly.) So before we proceed further a few brief remarks to the “suppression” camp.

Analysts such as Ted Butler have been sounding the suppression klaxon since 1989 but I ask: Why look for a complicated explanation when supply and demand offers a simple, perfectly adequate explanation?

Throughout the period, such sell-offs that did occur, as well as announcements of planned sell-offs, caused immediate declines in the price of silver. Indeed, the Wall Street Journal reported in September 1976 that "[w]hen the US government makes noises about selling silver from the federal stockpile, futures traders start unloading futures contracts in speculation that such a sale would depress prices.”

Silver was a natural short play in the 70s, 80s and 90s. There were, collectively, huge amounts of silver overhanging the market in the form of old coins, national reserves, public and private stockpiles. That silver stock was mobile. The low price of silver over many decades had also made primary silver mines uneconomic. The silver that did come from the miners was mainly a by-product of their pursuit of other ores. Hence the silver was extracted and sold with little regard to the price of silver. All in all, a short seller’s dream come true.

I would argue that 2002 was the watershed year for silver, the year when the US Defense National Stockpile was nearing depletion as a result of the Silver Eagle coin program. That opened the way in 2003 for silver to join the long cycle commodity uptrend along with other industrial metals, agricultural commodities and so on. This in turn created the opportunity for a well-resourced trader to safely play either side (long/short) of the silver market without fear of a sudden influx of metal.

In this story, the end of the supply overhang also opened the way for an attempt to corner the flow of physical silver as the remaining stock was becoming increasingly immobile while demand from industrial users was growing strongly.

Ted Butler (and, to be fair, many others) allege massive naked shorting on the silver Comex. Ted lays out his case here. From what I have read it appears that in Ted’s narrative this massive naked short position is held, primarily, by JP Morgan and perhaps HSBC. This is how Ted’s tale ends—the Comex shorts will be chased over the “cliff” by the longs in a massive short covering squeeze - just like these bison:

“Head-Smashed-In Buffalo Jump bears witness to a custom practiced by native people of the North American plains for nearly 6000 years. Thanks to their excellent understanding of topography and of bison behavior, they killed bison by chasing them over a precipice and subsequently carving up the carcasses in the camp below.”

I want to be upfront with you. I think Ted and his cohort may prove to be dead wrong, finding themselves in a role reversal falling head-first with the bison and anyone else beguiled by their story. We will return to Ted’s story a little later when we consider the lack of transparency in the silver market and why the circumstantial evidence suggests that Ted and his cohort are dead wrong.

Let’s deal with another allegation which has been floating around, that JP Morgan inherited a huge naked short position in silver with their Bear Stearns acquisition. I’m not going to dwell on this for long. The fact that JPM was indemnified by the Fed on unknown terms for losses on this acquisition makes this a non-issue in my opinion. If there are losses I think we can safely assume that they will be picked up by Wall Street’s best little buddy, the American taxpayer.

The Central Characters and the “Supporting” Cast

The main characters in this story are the Bullion Banks, Miners, ETFs, Refiners, Mints, Retail Investors and the Industrial Silver Users. As this narrative unfolds it should be quite obvious that the only silver market operators with the capacity to make this story come to life are the international bullion banks. All that would be required of the other market participants is that they behave predictably. Their co-operation would not be needed by a manipulator. Let’s face it, the less people “in the know” the better.

(Incidentally if any reader needs an introduction to the precious metal fabrication and supply chain, Bron Suchecki of the Perth Mint has provided an excellent series of posts you can access here - top left of screen.)

The jewelry makers are peripheral to our story except insofar as the rising gold price has resulted in the increased substitution of silver for gold in the fashion jewelry business. So this segment of the market has added to the demand pressure on the flow of silver as well. In my opinion the gold jewelry market is much smaller than the official figures suggest. As Jim Sinclair has often pointed out gold jewelry in many Eastern countries is sold by weight and purity – it’s wearable ‘bullion’, not simply a fashion statement.

Miners have seen the price of silver rise to over US$40.00 per ounce while the Mineweb report (linked above) indicates that cash costs are currently $5.27 per ounce. Others estimate their average cost, by the time the silver is on its way to the refiner, at up to $15.00 per ounce. (The cost estimates put out by miners are notoriously unreliable. There are plenty of financial incentives for a mining company to understate their costs. Murray Pollitt discusses this issue here.)

The predictable behaviour a corner operator would expect from the miners is a desire to lock in some of their profits on silver through hedging. If a corner operator also advised the miners, provided finance and banking services to them and facilitated their hedging strategies it would give the operator a huge ‘edge’, a vastly superior information feed compared to other players in the silver market and more opportunity to influence the directional flow of silver.

A savvy corner operator might also see “the writing on the wall” in these high profit margins of the silver miners. A pointer to the “use by” date for their physical silver corner. Over the last few years silver ore bodies and old workings that were not economic for half a century have become financially viable.

Refiners produce a range of products in addition to the standard larger bar sizes. They produce flake, shot etc… to meet the specific needs of their fastest growing, and largest, customers - the industrial silver users. (Make no mistake, the industrial users are the most important customers in this market.) The challenge of matching their output to the demands of customers, with quite different needs, makes the refiners a potential choke point (a supply bottleneck) that a well-connected corner operator could exploit opportunistically.

The retail investor demand for silver has also been growing strongly. It has been reported that last year this segment accounted for around 10 per cent of total fabrication demand. Physical silver investors are price sensitive but many tend to just accumulate over time, dollar cost averaging their original stash. Many of these investors are “buy and hold” folks. From a corner operator’s perspective retail silver investors help to immobilize the stock, compete for the flow and they are somewhat predictable.

Institutional investment in silver generally flows into the ETFs, ETPs and mining shares for a simple reason. Many of these investors are prevented from holding physical metal by their investment mandates. Even if they wanted to they could not hold physical. I concede that mandates, and the laws that give rise to them, can be amended. (In order not to get bogged down in a “will too, will not” argument I hope others will concede that I have described the status quo.) Overwhelmingly pension funds and their ilk tend to the long side of markets they invest in. You know what I am about to say don’t you? They are predictable.

You are probably getting sick of the word ‘predictable’ by now but just try to imagine that you are a character in this story too. Imagine for a moment that it’s real. Behaving predictably might not be such a great idea if you are attempting to trade or do business in a cornered market.

Ed Harbuz CEO of the Perth Mint explains here why running a Mint is such a challenging, customer-driven business. Despite unsubstantiated allegations to the contrary the large Mints, by their actions, can be seen to be honest, conservative, generally prudent and not inclined to speculate.

The Mints' demand for silver is ultimately driven by retail and wholesale customers. Mints tend to have a “feast or famine” sales pattern that makes it difficult to forward plan capital expenditure programs. They certainly cannot expand their overall production capacity quickly. Hence they are also highly predictable and another potential choke point that could be exploited in a corner.

Industrial silver users are the single biggest market for silver, purchasing approximately half of the annual flow of silver. As mentioned earlier, this large market is growing strongly. A corner operator can rely on industrial users for profits when prices are rising. Here’s why:

“An important factor to understand in the case of silver is that demand from the industrial sector tends to be quite inelastic. This means that buyers have few options and have to pay at prevailing prices.”

In this story the industrial users would be the main target (victim?) of a corner operator.

When production bottlenecks occur at the Mints and/or the Refiners a corner operator could take advantage of the ignorance of most retail investors and play on the widespread belief that there is a shortage of silver. (I’ll return to this topic later.) The corner operator could also rely on many (all?) of the dealers to talk up any rumour or urban myth that sells silver. With premiums like these the dealers have every incentive to support the hype, hope and hysteria that often surrounds the retail silver investment market these days.

The Exchange Traded Funds (ETFs) are a segment of the market we should pay close attention to in our unfolding corner narrative. The ETFs that offer redemption in physical silver tend to have a minimum redemption quantity that is much higher than most small investors can easily afford. In most cases the shares trade freely but the metal in many of these ETFs sits still. Consequently these ETFs add to the stock while increasing its tendency toward immobility and they compete for the flow of silver. As Kitco reports here ETFs have become a huge part of the silver market (my emphasis).

The Web site for SLV shows that as of May 1, 2006, the amount of silver in the trust was a modest 653.17 metric tons. Flash forward to Thursday, and the Web site showed total holdings stood at 11,053.2 metric tons, or 355.4 million ounces, with total assets listed at $17.3 billion.

Through April 21, CPM Group put global silver holdings in 13 precious-metals ETFs around 605 million ounces…….For 2010, additions to global ETF holdings were 123 million ounces, Rannestad reported. In 2009, ETF holdings rose by 155 million ounces.

The ETF additions in 2010 represented 12.4% of total global supply of silver of 987 million ounce (including not only mine output but other sources such as recycling), Rannestad reported. Much silver is consumed by industrial uses. Excluding all fabrication demand, the amount of available silver was 142 million, meaning the ETF demand accounted for some six-sevenths of this.

SLV stands out from the other ETFs in three enormously important ways. Firstly, its structure and prospectus allow it to impact on both the physical and paper silver markets in ways that most other ETFs simply cannot. It’s also vastly larger than any other silver ETF or ETP. Lastly the SLV silver is literally both a stock and a flow at the will of the Authorized Participants. To illustrate, you may have heard Saudi Arabia referred to as the “swing producer” in the oil market. The Saudis are said to have the spare capacity to keep supply and demand in balance. SLV can fill that same role in the market for physical silver. In this story it does precisely that, with a slight twist. It is used pro-cyclically by a corner operator to amplify volatility in both directions, up and down.

Okay, I know that some observers confidently claim the SLV is just a paper façade with no actual physical silver. No amount of audits or bar lists will ever convince some of you otherwise. So be it. For those readers with an open mind, I invite you to consider the possibility that they have the physical silver they claim. For the purpose of this story it doesn’t matter if that physical silver is encumbered with multiple claims nor if SLV holds some paper silver for periods of time. In a corner the crucial issue would be who has the strongest claim to that SLV silver stock and the most influence and control over the flow of physical silver into and out of SLV. The industrial silver users obviously had some concerns about SLV’s potential clout. By the end of this narrative they might wish it had been drowned at birth.

Prior to its launch, the industrial silver consumers lobbied hard to try and convince the SEC to deny approval for this new physical-silver ETF. The Silver Users Association, whose members process 80% of all the silver used in the US, wrote a letter to the SEC in February 2006. It warned the SUA ‘opposes the creation of a silver ETF because of the concerns that doing so will require the holding of physical silver in allocated accounts, thus removing large amounts of silver from the market.’

And indeed the industrial silver consumers’ fears have come to pass. In mid-December 2010, SLV’s holdings hit an all-time high of 352.5m ounces of silver bullion! To put this into perspective, global silver production in 2009 ran about 700m ounces. American stock investors, by buying shares in SLV, have already absorbed the equivalent of half a year’s worth of all the silver mined in the world. (My emphasis)

As I said earlier SLV is different to other ETFs. Below FOFOA replies to a question I posed in February when we were discussing the idea of a silver open forum.

”Very interesting. Considering that ‘demand’ exerts no pressure on an ETF to grow in size, one has to wonder. Physical contributions are the ‘will’ of an owner or purchaser of physical silver to encase it in SLV in exchange for easily tradable shares. The price-tracking function is simply a matter of market arbitrage. But of course this fact is not understood by the public. Very interesting.”

The custodians for SLV are HSBC and JP Morgan. Authorized Participants create and redeem baskets of SLV shares. You can find a list of them here (on page 27).

Before we end this examination of ETFs, and SLV in particular, I would like to leave you with a question to ponder. Has the price of silver become more volatile since SLV and the other ETFs started to gain traction in the silver market?

Martin Armstrong describes the typical behaviour of commodities as they move through an uptrend in the extract about wheat from this essay.

"In other words, we are about to make another thrust upward into a new trading band where the $6-7 level should become the floor. This is how commodities ratchet themselves higher that some call inflation. What is actually taking place, there is a very broad trading range that becomes the normal volatile swing between the peaks and the lows. The commodity will bounce off the floor and ceiling of this range until it starts to finally expand the trading ranges." (My emphasis)

Now let’s examine the Bullion Banks as we look into a would-be corner operator’s three most lethal weapons (aside from unlimited ‘free’ money) – opacity, reach and information.

Opacity, Reach and Market Intelligence

Since the repeal of the Glass Steagall Act some international banks have become monoliths in banking, broking, dealing, commodity trading, derivatives, research, private exchanges and OTC markets. Even a vigilant, well-resourced regulator would struggle to prevent “regulatory arbitrage” by banks, traders and speculators operating in multiple exchanges and markets in a number of legal jurisdictions. And vigilant, well-resourced regulators appear to be a little thin on the ground these days. The global activities of these banks are opaque to regulators.

The bullion banks have the very best ‘intel’ on the silver market. They have connections into every nook and cranny of this market from miners to Mints to margin traders. They also have the opportunity to make use of their own unallocated pooled silver accounts through fractional reserving. You can read about how the bullion banks are able to leverage these pools here.

As we mentioned earlier the Comex is basically a paper silver market. The leverage in this market has been widely discussed since the revelations early in 2010 by the team at GATA and CMP group’s Jeffrey Christian. (It is less widely known that ANOTHER revealed, thirteen years earlier, that the leverage in the LBMA was routinely 100:1.)

Let’s clear up another popular misconception. This one concerns the LBMA. As Bron Suchecki explains here, the LBMA is not an exchange. It is an association. Transactions among LBMA members and their clients are private. Bron also reminds everyone that the LME does not trade physical silver. For anyone interested here is a list of the Market Making members of the LBMA.

Some silver market analysts focus on Comex reports and the BIS bank participation report in order to draw conclusions about the positions of the bullion banks, and others, in the silver market. Ed Steer of Casey Research writes:

"The third graph is the number of US and non-US banks...and you can see the point that the CFTC began to withhold the number of banks so that they could protect JPMorgan. They started withholding this data when Ted Butler discovered the Bank Participation Report back in 2008...and within months, the CFTC pulled the data………… and the last graph is just the two US banks on their own....and their respective long positions [non-existent] and their monstrous short positions. It's easy to see that JPM runs the silver price show." (My emphasis)

Let’s assume that the information Ted Butler pounced on was as valuable as Ed Steer and Ted Butler seem to think. That line in Ed’s report I highlighted in bold prompts me to ask: What does it tell you about the rest of the public data feed if useful data you unearth is “pulled”?

The allegation that JP Morgan, HSBC etc have massive naked short positions in the silver market rests on a range of published data from regulators and bankers but primarily on the Comex reports. As mentioned earlier the silver Comex is a market that accounts for only around 5 per cent of the physical silver traded annually.

One of the tactics recommended by some analysts to break the Comex shorts is for all of the longs to stand for delivery. So readers may be interested in this explanation of trading between longs and shorts on the Comex from Metal Augmentors’ ‘silverax’. Here are a couple of snippets:

“…. the longs cannot force delivery on the shorts, but the shorts can force delivery on the longs. Yes, most everybody has it bass ackwards!”

“…..the delivery timing is almost entirely dependent on the short. It is the short that announces an intention (notice) to deliver and it is the long that is obligated to accept delivery. Not the other way around.”

If any reader, with an intimate understanding of the Comex, has the time to read the ‘silverax’ essay and post a comment here I’m sure we would all appreciate an explanation of how longs standing for delivery could force the shorts to deliver. Assuming, of course, if anyone did try to force the shorts into a physical default that the Comex would not intervene on behalf of their most powerful members - like they did with the Hunts.

The volume of physical silver, and other commodities, traded on the public exchanges is dwarfed by the trade conducted in wholesale transactions, private deals with banks (eg. members of the LBMA), through OTC markets and other parts of the shadow banking system. These alternative markets are both huge and totally opaque to outsiders. As this analyst notes:

"....the big players in banking and finance are using the OTC system and have a turnover 12 times that of the “public” markets..." (My emphasis)

It appears that the volume in the OTC markets and shadow banking “dark pools” comes at the expense of both liquidity and stability in the public exchanges. As a result the price discovery function of the public exchanges may be seriously compromised. At the same time the off-exchange trading must reference, at least to some degree, the prices "discovered" on the public exchanges. What a fricken mess! But an ideal environment for market manipulation.

David Galland of Casey Research had an interesting discussion with Dr. Andrew Bogan (here) on the subject of short selling in ETFs. Apparently some of the stock ETFs have short selling levels up to 1,000% (compared to, say, IBM stock at around 1.4% short). In order to put their discussion in context, Andrew Bogan explains how ETF shares are created:

Shares can be created at the end of any day if someone delivers a basket of underlying stocks to the ETF through an authorized participant. And shares that are not wanted in the marketplace can be redeemed in kind for the underlying stocks – or in some cases cash. That's all been carefully structured and works smoothly. The issue is what happens when short-selling dominates the trading. (My emphasis)

This is the part of the interview I think we should pay close attention to, where they discuss GLD. Keep SLV in mind as you read this. Andrew Bogan again (my emphasis):

The tracking of an ETF's price with the fund's NAV, which historically has been extremely close, is totally dependent on an arbitrage mechanism. The arbitrager can make money by continuously pushing the price of the ETF toward its NAV.

The short position in GLD isn't nearly as large as it is for some equity funds – but we have looked at GLD, and it has the same structural issues, just to a lesser extent, at least for now. The short interest in GLD has fluctuated around 20 million shares. Now, GLD is a pretty big fund. With 20 million shares short, it is roughly 95% fractionally reserved…… But GLD does not have to stay at 95% fractionally reserved.

DG: Could they just say, "From here on, we're not issuing any more shares"? Would that stop the short-selling?

AB: Not necessarily, because, you know, the short-sellers are selling – in fact, it would probably exacerbate the short-selling. So as long as a fund is issuing shares, aggregate buying demand can be satisfied by expanding the fund. If they stop issuing shares, aggregate demand would get satisfied by short-sales of existing shares. So, if anything, closing the issue window should make the problem worse, not better.

…….. The bigger challenge might be if there were an actual redemption wave. If that happened when GLD was already substantially fractionally reserved, then you're back to an 1800s gold bank problem. Fractionally reserved banks can be hit with a run………You know, one of the big risks, by the way, that no one has really discussed much, is if an ETF were to have a big redemption run in panicky market conditions and halted redemptions……. it's quite possible that if redemptions were halted for any length of time, the arbitragers wouldn't be keeping the share price in line with NAV. We already know from the Flash Crash that significant price departures from NAV are quite possible for ETFs.

In his new book Matt Taibbi discusses the spectacular growth of commodity market speculation.

"We know the amount of speculative money in commodities exploded, that between 2003 and 2008 the amount of money in commodities (Ed: derivatives?) overall went from $13 billion to $317 billion, and that because virtually all investment in commodities is long investment, that nearly twenty-five-fold increase necessarily drove oil prices up around the world, putting great gobs of money into the coffers of the SWFs." (My emphasis)

In this recent post Adrian Ash quotes a figure from Barclay's Capital of $412 billion as the level of global investors' holdings of "raw materials" at the end of March this year.

Most of these predictably long funds are up against speculators and the prop trading desks of banks with near-zero cost money and virtually unlimited leverage. Opponents who will play both the long and the short side. To make matters worse, by being in these paper markets in the first place, these long side speculators expand the derivative markets to the point where they can dwarf the actual physical commodities traded. Hence the paper derivatives may be unduly influencing prices in the physical plane. ThyssenKrupp CEO Ekkehard Schulz appeared to think so in this interview with Der Spiegel (my emphasis):

Schulz: (Ed: talking about new entrants into the iron ore market) But we now know of a few major investment banks that are painstakingly preparing to enter the ore market. One of them is JP Morgan. They have been buying up big in this sector.

Later in the interview:

SPIEGEL: Who are they, and how are they preparing?

Schulz: I don't want to mention any names here, but they are banks that were also involved in other big speculative bubbles. They are currently active in our markets, hiring natural resource specialists, buying trading companies and leasing storage facilities at major ports, where they can temporarily warehouse ore for speculative purposes. They see an opportunity to make billions in profits.

SPIEGEL: By driving up prices on the ore market?

Schulz: By disconnecting prices from the real economy and the natural resources from real consumption. This has already happened with nickel. Speculators and banks are already turning over 30 times as much nickel in the markets than is actually consumed in steel processing and other areas. In the process, the price per ton fluctuates between €10,000 and €50,000. Imagine a situation like this in a large-scale natural resource market like that of iron ore. The consequences would be devastating.

Putting all of this together, the presumption that the positions of JP Morgan, HSBC etc can be known from publicly available data is beyond incredible. To suggest that you can know they have a massive naked short position without knowing what other positions they are holding outside of the Comex and how their overall books are structured, is, in a word, absurd.

Before we take a look at how some of the price action in the silver market over the past few years could have been very profitable if a corner was in place it would be remiss of me to sidestep Max Keiser’s “Crash JP Morgan” campaign. Here’s why:

(Note: I changed some of the paragraph breaks to compact this but the words are unchanged. I suggest you read the comments on this post as well. My emphasis in bold.)

Dear Max and Stacy,

My local dealer,, has been running OUT of Silver,, over and over again. Gold is available,,but SILVER is in HOT demand. I cleaned him out this time.. had to go so far as buying up the sterling silver flatware,, but hey,,silver is silver. Had some Kruggerands and Eagles (Au),, sold them and bought Silver. I have NOT liked the way Gold is not climbing up as silver has been doing,, so I finally got OUT of gold.

I didn’t know that I had so much gold,, been sitting on it.. so for me,,it was like buying $9k of silver,, for only $5k out of pocket…and now,, my “metal” will be rising even faster. But I hope I never have to stoop to buying any silver ”tea sets”..as they are just TOO bulky to fit in the under-floor safe. Hahaha… I’d have to SLEDGE HAMMER them into a small ball of ugly junk…but I’m OK with that. Silver is silver. Millionaires already have all the ”tea sets” they want.

Craig.

2. This extract is from an e-mail issued by Bix Weir of The Road To Roota. Sent: 1/3/2011 (My emphasis)

“Let me give all you "Newbies" a hint...by the time you finish researching and comparing silver to all the other investments out there you will go ALL IN!

3. Museice is a frequent contributor to the comments here at FOFOA blogspot. This is an extract from a comment he posted recently after deciding to roll his physical silver for physical gold.

For any Silverbugs out there (I was one)….. My conclusion: What does the GSR have to do with Freegold? Absolutely nothing! If you understand anything FOFOA has been writing you will bail on silver. Not because it has hit its peak. I don't care how high it goes. You will switch because you are holding the wrong metal. End of story.(February 18, 2011 8:19 PM)

4. In the video below Michael Maloney of GoldSilver.com responds to that old chestnut “There isn’t enough gold” with “Baloney”. He then goes on to explain why. As I watched this for the first time the question on my mind was: “If gold can do the job on its own why do we need silver?” I had already started to have reservations about the silver we were holding. This video was one of the ‘nudges’ that prompted me to dig a little deeper (well, actually, a lot deeper). It should start playing at the 3:50 mark automatically:

Later I came across a few videos of presentations by Robert Kiyosaki. (I think he wrote a book called “Rich Dad, Thanks To Your Dad” or something like that.) The video quality on this clip is terrible so I am just going to provide you with a link . It is set to start at the 4:20 mark. Kiyosaki is asked if he is adding to his positions. He talks about silver among other things and then goes on to mention who will take his positions off his hands “just before it blows” – the “suckers”. Michael Maloney, one of Kiyosaki’s advisors, is in the background stage left. Who are the suckers? I’m going to suggest a candidate for that role at the end of this post.

And wow, that Bix Weir is certainly confident when he talks to newbies, isn’t he? Quite at odds in his thinking to many of the people who frequent this blog. Some of these folks have been delving into the matters we discuss here since 1997 when ANOTHER was posting his Thoughts. I don’t remember seeing anyone here give such bold advice as Bix about gold, especially not to inexperienced newcomers. So before we look at Max Keiser’s recent exploits, let’s revisit the issue of silver shortages in order to see if Bix Weir and some of the other silver experts may be a tad overconfident about the rarity of silver.

The Silver Shortage

First a few words to explain why I keep linking to Bron Suchecki’s posts and the Perth Mint in this story. Bron has made a huge effort to educate people about the precious metals and their markets over the past few years. The Perth Mint has recently launched its own blog and updated website. They have made a real effort to increase their transparency and to communicate with their customers and the general public. Some other Mints have a mixed record in this area. This report about a recent Congressional Panel makes for interesting reading if you follow the activities of the US Mint.

The Perth Mint is also a unique ‘animal’ in the gold and silver markets. Around 90% of their fabricated product is exported. Roughly half their pooled and allocated customers are outside Australia. They are also an integrated operation having their own refinery. Lastly they refine anywhere from 300 to 400 m/t of gold each year while Australia’s local production is around 250 m/t. They are a big player with excellent ‘intel’ on the silver market both locally and internationally. [Updated per footnote 7]

Back to the shortage issue. All through the recent huge increase in the price of silver the usual suspects were talking about shortages. Well, someone forgot to tell the folks at the Perth Mint. All through the “shortages” they frequently confirmed that there was “no shortage of metal”. You can read their updates on their blog. Production bottlenecks? Sure, but no shortage. In fact they are seeking to expand their market into China.

Who was talking about shortages and tight supplies of silver? Dealers and Bullion banks, apparently. The following quote was attributed to Dave Madge director of sales at the Royal Canadian Mint by Eric King over at the KWN blog:

"We are anticipating it to become even more difficult to secure supplies in the future. This is based on what we are seeing firsthand and what our suppliers are telling us. We work closely with these banks to secure silver and they tell us there is a lot of competition.” (My emphasis)

Alex Stanczyk of the Anglo Far-East Bullion Company mentions these reported comments by Dave Madge here. Here are a couple more links discussing the mythical metal shortages: link, link.

In response to this claimed shortage the Perth Mint is spending millions of dollars expanding its capacity to fabricate silver products. You can read about it here. Recently the Perth Mint did something that should help to convince you that there is no shortage of silver.

For many years the Perth Mint funded their gold and silver inventory through a certificate program backed by unallocated pools. The deal was simple, they got their inventory funded (less capital tied up) and the certificate holders got safe, free storage of their metal. The certificates could be exchanged for fabricated metal or cash. Recently the Perth Mint announced a change to this program which you can read about here and here. If you want to be part of the pooled unallocated silver program in future you will have to pay them storage fees. Let me break this down for the stragglers, they have plenty of silver, perhaps much more than they need and they don’t foresee any shortages in the near future.

Not enough for you? Okay, let’s take a look at recycling. Another frequent claim from the shortage spruikers is that most of the silver which is consumed cannot be reclaimed. It is not economic to recycle most of the products sold that contain minute quantities of silver. This is absolutely true. But never, say never. The viability of recycling is a question of price, proximity and technology PP&T). Let’s take a look at just one product for now - the cell (mobile) phone.

According to this USGS fact sheet (2006) there is a mere 0.35 grams of silver in the cell phone they based their study on. But this cell phone also contains “copper, iron, nickel and zinc” with “even smaller amounts of aluminium, gold, lead, manganese, palladium, platinum and tin”. Cell phones also contain plastics that become increasingly expensive when the price of oil rises.

Lastly, most of the cell phones, and other electronic devices, which make their way into waste streams end up in landfills. In many countries landfill is becoming prohibitively expensive in both financial and environmental terms. These devices are a pollution issue. Schemes proposing to add a deposit or bond to the selling price of new electronic devices, in order to subsidize the cost of recycling them at the end of their life, have been fiercely resisted by industry groups. Thus far the industry groups have prevailed.

Is there likely to be a huge increase in the amount of recycled silver from electronic devices any time soon? I, for one, doubt it but it is an issue of PP&T for several metals and other recyclables in these products, not just silver. So never, say never.

Here’s another potential headwind for the “silver to the moon” guys - the industrial silver users themselves. The manufacturers of the devices which use much of the consumed silver are in cutthroat competitive markets. They have to work hard to remove costs from their products. That includes silver of course. Higher silver prices give them even more incentive to focus on cutting down the silver content or replacing it with a lesser alternative such as copper. FOFOA has an anecdote about one such manufacturer that has already eliminated silver from his process. That said, I will concede that the expanding industrial uses for silver and increasing global demand for products containing silver may fully offset any reductions that the industrial users can make.

Finally don’t forget about the potential for increased supply from the silver miners. As I mentioned earlier “over the last few years silver ore bodies and old workings that were not economic for half a century have become financially viable” at higher silver prices.

Now I know these arguments won't be enough for some of you. Read on, we will touch on this “shortage” issue one more time from an angle that might surprise you.

Max Keiser was one of the earliest, most outspoken critics of the appalling behaviour of the Wall Street banks. I believe Max coined the evocative phrase “financial terrorists” to describe them. He was also one of the first media figures to advocate owning gold bullion to protect your wealth. Kudos to Max for his bravery and willingness to speak out. This aired September 18th, 2008, and the video should automatically start at the 1:44 mark.

Since gold advocacy started to become increasingly fashionable it seems that Max decided he needed a little “brand differentiation” and followed the political dictum If you want to be a leader, find a parade and get in front of it. In an apparent attempt to capitalize on the growth in silver investment, last November Max launched the “Crash JP Morgan” silver campaign. He too argues that JPM has a massive naked short exposure in silver. He claims that they can be brought down through the purchase of physical silver by retail investors.

Nowadays Max is the self-styled leader of a movement calling itself the Silver Liberation Army (SLA). Apparently the expectation is that untold millions of people will each buy some silver and the ensuing supply squeeze will cause JP Morgan catastrophic losses on their supposedly naked short position as the price of silver goes to figures as high as US$500 per ounce. I hope earlier parts of my story have given you serious doubts as to whether anyone can be sure that JPM is even short at all (naked or otherwise).

Max and his SLA give us an ideal opportunity to conduct an extremely important thought experiment and to revisit the notion of a shortage of silver (one last time). This experiment is extremely important if you are holding silver because the outcome may force you to conclude, like Museice, that you are holding “the wrong metal”.

Now, for reasons best known to themselves, the “pin-up girl” of ‘Colonel’ Keiser’s SLA happens to be Blythe Masters of JP Morgan. As I said from the outset this is a story of manipulation, not suppression. But to please the SLA we’ll make ‘Blythe’ the main character in A Scenario: Profiting From A Silver Market Corner which we will come to shortly.

Position Vacant: Corner Operator – Silver Market

I realize that we have covered a lot of ground already so before we proceed any further I’m going to summarize the key attributes, resources and capabilities that I think we could expect to see in a successful silver corner operator. As a major international bullion bank JP Morgan would certainly tick all the boxes below in terms of their capacity to breathe life into this narrative (or some version of it). But then so would HSBC, I imagine, and some of the other bullion banks, or a combination thereof.

• An information advantage over other silver market participants.

• Control/influence over a vehicle like SLV that can be used to hoard a large quantity of physical silver which can then be used to affect the flow of silver.

• Intimate connections with the silver miners and insights into their finances and hedge books.

• The ability to trade against clients, produce research that encourages investors to take the opposite side of your trades and access to media outlets that are receptive to your “press releases”, research bulletins and expert commentary.

• Sufficient capital to finance the corner.

• Captured regulators.

• The ability to keep other market participants in the dark about your activities, the structure of your book, where and how you are taking profits.

• Intimate knowledge of the choke points (Mints and refiners).

A Scenario: Profiting From A Silver Market Corner

As I promised the SLA, I’m going to make Blythe Masters of JPM the central character in this scenario. (For other readers, where I have used the word ‘Blythe’ please read Blythe Danner or BB trading desk, favoured clients and likeminded BBs.)

After the GFC hit in 2008 the industrial silver users pulled their bids for silver and ran down their inventories. The price of silver collapsed to around $9.00 from its previous high over the $20.00 mark. During this period ‘Blythe’ took profits by shorting the paper silver market into the ground knowing there was no solid floor under silver until the industrial users came back in. ‘Blythe’ began to build a long (that’s l.o.n.g) position in silver as the price bottomed and began to recover.

Some of the savvy traders and speculators came in at the lows because the GSR was way above the median of the last 10 years and they saw a panicky market that they were happy to take a contrarian position in.

Once it became clear that demand from the industrial silver users was reviving, ‘Blythe’ made the final preparations for her next play, a short squeeze in physical silver with the industrial silver users as the target. As we noted above these natural longs had run down their inventories. As sales of their products picked up they had to buy, regardless of price, or their production lines would have ground to a halt.

‘Blythe’ added to the pressure on the flow, and the price, by using SLV [1] and the other levers at her disposal outside the public exchanges to drain physical silver from the market. She sold down her long silver position into the rising demand from the industrial users at increasingly higher prices.

‘Blythe’ knows the refiners are a choke point. When they shifted their production focus to their industrial clients, they cut back on their bar production for the Mints and the wholesale market. This eventually started to cause some delivery delays in London on LBMA good delivery bars. [2]

‘Blythe’ knows that when there’s a surge in demand at the retail level, at some point, the Mints aren’t able to keep up. As silver approached its previous high the retail investors started coming in. Speculators moved in too, cautiously at first, pushing up the paper silver price.

The coin dealers and the silver perma-bulls started beating the drum about impending shortages. Eventually the Mints were struggling to keep up with the surge in demand due to the limitations in their fabrication capacity. As rumours of shortages and delivery delays made the rounds, the demand from the retail silver buyers went into overdrive. [3]

‘Blythe’ squared her books after the long physical play ran its course and she was neutral (neither short nor long). The speculators had started to pile into paper silver. So ‘Blythe’ got ready for her next play – a pump and dump in paper silver.

By this time the refiners had shifted their focus to bars as demand from the industrial users slowed. Wherever possible, the Mints had ramped up production and increased their output. Both of these choke points had begun to open up again.

‘Blythe’ had another ace up her sleeve. She knew the silver miners’ dormant hedging programs were about to come back to life long before the market knew. The miners were making noises to other parts of the JPM empire about hedging at these high prices. [5] Perfect set-up for ‘Blythe’. She piled on the shorts into the run-up to the blow off top in silver while she took the other side of the hedges put on by the miners. (That’s a future long physical position if she decides to hold onto it. It doesn’t bother her either way. She can always offload/offset it with SLV.)

The industrial silver users had begun to pull their bids as well. The traders and speculators, who took advantage of the high GSR, took advantage of the multi-year record lows and rolled some silver for gold. (Not all of it, no way. This game wasn’t over.) The coin dealers started to get nervous as their silver inventories began to build. The small fry were getting nervous about buying at record prices. The Mints ceased to be a choke point. Almost time for the dump.

‘Blythe’ painted the tape at the Comex with ever higher prices on thin volume [5] while she piled on shorts. All ‘Blythe’ needed now was a catalyst to turn the nervousness among the leveraged speculators into fear. ‘Blythe’ didn’t know or care what the catalyst was. Margin hikes, whatever [6]. As soon as sentiment shifts Blythe runs every stop she can. She tries to accentuate every dip until something puts a floor under the price. What, for example? “Who cares,” ‘Blythe’ replies, “I’m a trader."

After the dump ‘Blythe’ is neutral (neither short nor long). She’s just cruising, scalping small profits on the normal trading activity of clients while she looks for her next big opportunity. With this in mind she is watching gold very, very closely right now because she knows something most of us don't ......

What’s next? As a blogger known as London Banker used to say: “Wash, Rinse, Repeat.”

Trading

Some of you have made a lot of money trading gold and silver over the past few years. There are some enormously savvy traders out there. Newcomers who might be tempted by the profits in trading these metals should take a look at the charts and commentary that Nigam Arora provides here. That’s some volatility in those ETFs isn’t it?

So newcomers, for a moment, please pay attention to an old fool who has made every costly mistake you can think of (and some you probably haven’t). Please, do your homework. If you go stumbling around in these markets with your head full of nonsense and misinformation, margined to the eyeballs ‘Blythe’ will, sooner or later, take your head off at the shoulders. These are zero sum games that are being played. In order for ‘Blythe’ to win others must lose. This isn’t just my opinion. It’s a fact, Jack!

As I said earlier there are some savvy traders out there. I’m not one of them. I don’t have the skills or the temperament for it. Yet, I was able to predict the paper silver market’s behaviour and to get the timing just about right by drawing on this insight into rigged markets – “those who can be screwed, will be screwed” (it is a zero sum game after all).

Even if you are not a trader it also helps to read the writing of savvy traders and analysts like (in no particular order) Ben Davies, Tom Szabo, Adam Hamilton, Gene Arensberg, Trader Dan Norcini, Jim Sinclair, Alf Fields, Martin Armstrong and Stewart Thomson. There are others. Some of these fellas have subscription services. If you want to trade or invest under their guidance you can read their archives before you dive in and see the calls they have made. In some cases, over years. (If you want to put forward your own recommendations. the ‘comments’ are wide open.)

Many visitors to this blog have said that at some GSR level they are going to roll their silver into gold. Some of these high ‘rollers’ will be thrilled at the returns they make compared to plodders like me. However, I would like to point out a potential pitfall in attempting to play the GSR that I recently shared with one of my best buddies at the FOFOA blog.

There are serious risk assessment issues that need to be addressed if you are holding physical or paper silver with a view to rolling into physical gold at some desired GSR; in other words, if your aim is to obtain (via a GSR arbitrage) physical gold as your ultimate destination.

Let's walk through the risk assessment together. These days the GSR is generally calculated based on the Comex spot price of paper silver and paper gold.

To the unthinking, the GSR seems to imply some kind of direct exchange. As in 34 ounces of silver for 1 ounce of gold. Obviously this can happen by way of direct barter. But in most cases it is an indirect exchange. You have to transition through currency, selling one metal for an amount of currency and exchanging that currency for the other metal. The fact that you have been able to do this simultaneously and reliably in the past does not guarantee that you will be able to do so in the future.

Many here anticipate the eventual failure of the paper gold market. The paper GSR could be 1:1 if there is a systemic failure in the paper gold markets but that would be a currency ratio not a metal exchange ratio.

In a recent essay Eric Sprott made many interesting observations including this one:

"Now, it’s true that another potential source of supply is the very silver that investors already own......."

I agree, Eric, some of that stock could mobilize. In fact I know that some of it has already joined the flow and more of that stock intends to flow at some point. As Robert Kiyosaki told us in that video I linked earlier, that is his plan.

For those who have physical gold as our ultimate destination, the key risks are obvious. You have to weigh the risk that no dealer will want our physical silver because many other silver holders are trying to exit at the same time. Secondly, you have to weigh the risk that when you want to exchange silver for physical gold there are no sellers of gold at the paper GSR price, or even worse, no sellers at all.

I realize I may have tested your patience and forbearance with this very long post. If you aren’t yet convinced that silver is merely a ‘trade’, or an item for barter in a world gone completely mad, please take a little more time to share a thought experiment with me. You can let me know in the comments if you still feel the same way at the end of it.

A Thought Experiment

As I said earlier Max and his SLA give us an ideal opportunity to conduct a thought experiment. This experiment might lead you to conclude that in holding silver you are holding “the wrong metal” to carry you through a transition into a new monetary and financial system. If anyone wants to argue that the current system isn’t ‘terminal’ please jump right in with your comments and links. There are many ruinists* here of the hyper-inflation school (*h/t Rick Ackerman for that word). As promised we will also revisit, obliquely, the claim that there is a shortage of silver.

I’ve read a lot of the comments by Max Keiser and his SLA supporters about their campaign. Obviously I don’t believe for a moment that they can ‘crash’ JP Morgan by buying silver coins, teapots and small bars (or large bars for that matter). However, I don’t think that invalidates a thought experiment which treats the SLA as a proxy for the silver advocates and JPM as a proxy for the current system.

Many of team SLA, and other vocal advocates for silver, seem to be convinced that it will return to prominence in a new international monetary system. Others simply see it as “real money” returning to its rightful place in the world economy. Some, like Bix Weir, seem to see that rightful place as the pre-eminent “money”, the “people’s money” that will lift the yoke of a corrupt monetary regime from the necks of the citizens. I can see how firmly held beliefs such as theirs lead them to such passionate advocacy for silver.

What I can’t seem to find anywhere is a roadmap, a ‘battle’ plan from any of these silver advocates showing how they get to their ultimate goal. Will silver achieve their aims spontaneously? Is it likely to be unopposed by our proxy for the status quo, JPM? As the saying goes “if you don’t have a plan, plan to lose”. So as a thought experiment I would like to sketch out such a plan in order to test the achievability of the aims of the silver advocates.

Let’s recall that definition of a corner.To “corner the market” is to control enough of a particular commodity to allow the price to be manipulated…..The corner operator hopes to gain control of enough of the flow of the commodity to be able to set the price for it.

The ‘military’ objective of the SLA is to corner physical silver. They want to control enough silver to set the price a lot higher and break JPM in the process. How are they going to do that if they don’t get a corner? Likewise if silver isn’t monetized how can it be part of any new monetary system they are advocating? They’re not going to get any support from the establishment. This will have to be done solely through people power.

The SLA’s war will have to be fought on three fronts. They will obviously have to corner the flow, but what if the stock begins to flow as well? Obviously I think it will flow. And more on this ‘third’ front at the end of our thought experiment.

Is there any precedent for this type of military adventure? As luck would have it, yes there is - gold. A similar war has already been fought in gold. So we can examine the recent history of gold and glean some lessons for the SLA plan and the topography of the battlefields they will be fighting on. Along the way we’ll identify some similarities and some differences in the circumstances of the two metals.

After WWII gold was effectively cornered by the US government. Over the next several decades that gold became more evenly distributed into the asset reserves of other central banks, governments and private hands. The stock of gold flowed freely during this post-war period despite the general public, in most countries, being prevented or discouraged from owning gold.

Fast forward to the present. Somewhere around 30,000-33,000 m/t of gold is in CB and government coffers while the balance, over 130,000 m/t is ‘out there’ in private hands - right now. (Whose hands? That’s one of the issues we discuss at this blog.) In this thought experiment it doesn’t matter whose ‘private hands’. Only two things matter. Firstly, this stock has not flowed despite a fivefold increase in the price of gold since the first Washington Agreement signaled the end of central bank leasing of gold to the bullion banks. This gold stock is not giving any indication that it will join the flow, quite the reverse in fact. The gold stock has become highly immobile. It is in the strongest of strong hands.

The investment demand for gold has had to compete solely for the flow of gold in recent years. This flow has been supplemented by a huge increase in the supply of scrap gold which was readily absorbed by investors. (Gold scrap topped out about a year ago.) The gold fashion jewelry market is a shadow of what it was. The demand for gold displaced in this market, by silver and other materials, had to be absorbed by gold investors as well. They did, comfortably.

According to some estimates there was a single digit increase in mine supply last year. The only countries with substantial increases in their (already large) mine production (mainly China and Russia) have also been adding to their own reserves. Gold investors have demonstrated their ability and willingness to fully absorb all of this flow by continuing to bid the price of gold up.

The gold investors also now have some extremely powerful de facto “allies” that the SLA does not. The Central Banks and Treasuries are net gold buyers again. These are fantastic allies to have. They issue their own fiat currencies so there is no objective limit to how high they can bid the price of gold. They can never “run out” of that currency either. They just need sound reasons for bidding for gold and those reasons are the raison d’etre of this blog. Now why would gold investors want this competition for the flow? For the stragglers, “over 130,000 m/t is ‘out there’ in private hands - right now.” This de facto alliance is between the private and public owners of the stock, not with those investors who are now competing for the flow.

Now let’s try to apply some of the lessons from gold’s experience to the silver advocates game plan. The SLA has a de facto ally (but a very unwilling one) in the industrial silver users. Because their demand is inelastic they have to pay the going price. They will, whether they like it or not, help the SLA with one of their key objectives—to increase the price of silver—by competing for the flow.

The SLA will need to expand its share of the annual flow of silver into the market to a level where they can take control of the price of silver. The existing SLA silver holders must hold and continue to buy in ever increasing amounts or the SLA will need a constant stream of new recruits. Rising silver prices and altruism (or anger and resentment toward JPM) are the only recruitment strategies they have, as far as I can see.

Based on gold’s ‘battlefield’ experience, in order to achieve their ultimate goals the SLA (and retail silver buyers in general) will have to continue buying as each of the following events unfolds (but not necessarily in this order).

At some price level, some of the stock of silverware and all the old coins will begin to flow into bullion. The SLA will have to absorb this flow and bid the price up. At some price the silver fashion jewelry market will collapse. There are other white metals and alloys and there is no silver bullion jewelry market to speak of. The SLA will have to absorb this flow and continue to bid the price up. At some price the scrap silver market will turn into a flood (just like it did for gold). The SLA will have to absorb this flow and continue to bid the price up. Then the going will start to get a little rough for them.

If I am right about SLV being used as the “swing producer” in the physical silver market it is already part of both the stock and flow. At some point the silver in the other physical silver ETFs will also start to flow. The sponsors of these ETFs cannot prevent this. If enough shares are presented they must tender the physical silver. If the SLA absorbs all of the flow described above, while bidding the price up consistently, they will demonstrate to speculators that there is a rock solid arbitrage opportunity. Speculators will pull this silver out of the ETFs and coin it to sell to the SLA. The silver ETFs are not ‘strong hands’. They are the weakest hands of all.

Then another problem will emerge. There are silver “traitors” outside the SLA and troops in the SLA ranks planning to “desert” at the first whiff of grapeshot. People who have no intention of holding silver indefinitely. Some, like Robert Kiyosaki, are waiting for the right time to offload to the “suckers” as he calls them. Others have a target for the GSR. When reached they intend to roll their silver for gold. Perhaps the SLA can keep up the pace of recruitment so that it adds new recruits to replace the deserters and continue expanding its forces. Another problem may emerge (later rather than sooner) for the SLA: increased mine supply.

The silver advocates take comfort in the fact that silver is used in such small quantities in each product that the industrial silver users sell, that high prices, even incredibly high prices, will not deter them from buying. That is most probably true. Score that one for the SLA. However, the SLA may have completely misunderstood the threat. The price may be irrelevant. Earlier in this thought experiment they cornered the flow and the stock. The political heat from the industrial users, including the military-industrial complex, will be ferocious if the SLA threaten the supply lines of these users. (Recall the recent controversy over China’s corner in rare earth metals.) Perhaps the politicians will stay firm. Perhaps they will only sequester the silver mine supply on national security grounds. If so, the SLA is still in the game.

If the SLA can overcome all of the challenges that have been listed so far and “bullionize” all of this silver into retail product, it will then be confronted with the most terrifying enemy it has faced in this war. Their third front – 160,000 m/t of gold. Michael Maloney explained why (indirectly) gold and silver are enemies. There is enough silver too. If necessary it could be the sole monetary metal, even if that meant dividing it into atoms. Do you understand the implications?

You see this phrasing all the time “gold and silver”. There is no “and silver”. In this thought experiment the correct perspective is “gold or silver”. If the SLA and the other silver advocates are successful in making silver the premier monetary metal then gold won't just be less valuable, it will be worthless to everyone, everywhere. Superfluous. Redundant. Just like silver is now in the monetary system. Gold now has no other purpose than being the crème de la crème of monies. If silver wins this contest gold will have no value at all except for a small range of industrial applications and as cheap jewelry. Hooray for the SLA.

Hold it right there SLA. This thought experiment isn't over yet.

The SLA needs to ask itself a few questions as we conclude this thought experiment: Who is holding this gold? Why are they holding this gold? How much power and influence do they have? What are their options and capacity to respond to the threat you pose?

If the SLA gets carried away with delusions of grandeur and the silver advocates start to achieve their aims, then the governments and Giants who hold this gold will respond. You can understand that, can’t you? The moment that silver presents a ‘clear and present danger’ to their interests, they will understand this threat. The threat that their gold is soon to become worthless. They will squash the silver bugs – like a bug. Silver would then be a losing bet for political reasons. If the SLA is clearly going to fail then the silver holders will be perfectly safe. The gold holders will simply ignore them. Silver will be a safe losing bet until game theory kicks in.

Let’s wrap this up with a final question: Are you holding the right metal?

…………………………………………………………………

PS. This is a short note about donations to the host of this blog (if Max, Ted and Bix have made it this far, they can probably skip the next few lines). Our host relies solely on donations to continue the work here. He accepts no advertising or commissions. If you have profited from the realization that silver is a trade rather than an investment you might care to share some of your profits with FOFOA by clicking on the Donate button on the right of your screen. Rest assured none of your ‘hard-earned’ will be coming my way. I’m a donor and I hope you will become one too.

Footnotes:[1] January 14, 2011 (Link) “Provocatively about 1/6th of SLV’s total silver hoard was acquired in less than 5 months between late-July and mid-December 2010. SLV’s holdings shot up 18.9% during silver’s massive 76.0% autumn rally we saw last year. This is no mean feat! The 55.8m ounces of silver this ETF had to buy over this short span is staggering.”

[2] Delivery delays (Link) “The industrials, when they see that there is tightness or delays in shipping, will then go out and stockpile silver so their assembly lines are not shut down. We would then be talking about potentially tens of millions of ounces required for delivery to these industrial users in a short period of time. The banks have told these industrial users for years that there is no problem with silver supplies. When these industrial users lose faith in the banks, they will move right away to secure stockpiles.”

[3] Record sales of silver eagles (Link) “The US Mint sold 6,422,000 Silver Eagles in January 2011 – half as many (again) as were sold in the previous record-setting month of November 2010.”

[4] Miners hedging again (Link) ”Raymond Key, head of metals trading at Deutsche Bank, estimates that about 100m ounces of silver has been hedged in the past two months. That compares with total outstanding hedges, called the global "hedgebook", of 20m ounces in late 2010 and annual mine production of about 700m ounces, says precious metals consultancy GFMS.

Michael Jansen, metals strategist at JPMorgan, said 2011 was "probably the year of the producer hedge". He added: "This bull market in commodities is maturing to a point where, as much as supply is under pressure, you can say with a bit more certainty that in two to three years it's going to be different."

[6] Margin hikes (Link) “The maintenance margin to trade silver with leverage is now $15,000. If you bought at $4 an ounce, the cost to buy 5000 ounces, fully paid for, would have been $20,000. The value of 5000 fully paid ounces of silver is now almost $250,000.

I believe leveraged trading of silver will end before the silver bull market ends. Silver fell $7 an ounce on Sunday night. That’s a $35,000 move per contract, and more than double the margin put up by the average leveraged player.”

[7] Updated with a correction from Bron Suchecki of the Perth Mint that pointed out a factual error in the post. Refining statistics provided by Bron Suchecki in the comments on page 2.

695 comments:

You make many of the same arguments I and others have attempted to bring up on some of the more famous silver bull sites. You're far more detailed and elegant than I am so I'm left only to choose that it wasn't the message, but the messenger who failed - ie. myself.

Thank you for putting together this post and accomplishing what I couldn't. It's truly one of the best posts I've read in months. Kudos to you!

Good research and analysis, Costata. Your point about bullion banks having the best intel is important.

Bullion banks are like spiders in the center of a web. They can feel the twitching of the flies in the web and determine the mood of the market better than anyone else and often in advance of others.

For example, if Mints are starting to see an increase in demand and begin running down stocks, they will start to take delivery ex-bullion banks, who as a result now have intel that retail demand is picking up before anyone else sees it in reported coin sales.

I think you also missed out that bullion banks also provide hedging and banking to industrial uses as well as miners. As they sit on both sides they can, again in advance of other market participants, feel the sentiment of those two sides by their flow/level of interest in hedging.

As to the naked short issue - see Ben Davies in http://www.hindecapital.com/docs/hil_reports/HindeSight%20Investor%20Letter%20April%202011%20Silver%20Criticality%20Why%20Silver%20Might%20Crash.pdf

"Concomitant with this manipulation is the belief that there is now not a readily available supply of physical silver. We sincerely believe that participants do not fully understand the dynamics at hand. We have believed the market to be run as an oligopoly with all that price controls potentially entail. So, yes, one of the US banks has too large a Comex position relative to Comex open interest and also annual supply. But investors misinterpret the nature of the short. We have never believed this to be a naked short. We believe that the short Comex is against unallocated long positions, ie OTC vs COMEX."

What those who micro analyse the COMEX data fail to consider is that bullion banks KNOW their actions in that market are being watched, while knowing that their actions in the OTC markets are not visible.

Where are they going to hold their real position - where everyone can see it? Would they not paint the visible tape to make market participants think what they want them to think about their position?

Costata, well done, very cogent analysis. I particularly like your analysis of Keiser's SLA vs silver flow. You definitely have me reconsidering my position in physical silver, and thinking about "risk management" as you put it.

I'm one of those people whose ultimate aim is 100% physical gold - my goal is to maximize the number of gold ounces I hold going in to the Freegold transition. Currently I'm 73% physical gold and 27% physical silver by value. I'm going to be buying physical silver at these prices because I believe that I will end up with more gold, as the ratio moves back in silver's favour.

There is one important number which convinces me of silver's extreme scarcity, and that is its basis. The backwardation in silver is at record levels, $1.33/oz going out to Dec 2015 last time I checked. Combined with the obvious shortages of retail silver and the "spirit of SLA" which I see spreading to the masses, I believe that there is a reasonable chance of a big-time spike down in the SGR.

I agree with you though that physical silver is a trade. It's not that different from going long neodymium (which has increased in value a few thousand percent), it's not money in the way that gold is, physical silver is just scarce and there is a sexy story there that can drive a demand frenzy. As long as the basis is negative the risks to purchasing silver seems very low and will likely result in more gold ounces than buying gold at this time.

Excellent thoughts, attention to detail, research and organization. Thanks for sharing.

My take is that this is not necessarily at odds with TF's view of the EE -- in the sense that bullion banks control the silver market and have done so for decades. The idea that Blythe M. and "Wynter Benton" are one and the same makes quite a bit of sense...

The scenario outlined is quite plausible. I have no issue with the facts and logic presented. My objections/misgivings about the conclusions of the article are:a) it is very strongly rooted in and dependent on the infinite and unchanging superiority of gold over every other asset known to man as a store of wealth. As a corollary, worships as deities A and FOA - possibly warranted, but generally a plan with negative side effects, regardless of virtue or original intent.b) omits any mention of the KNOWN ongoing monetization of silver by China, several US statesc) dismisses as laughable the notion that there would ever be a segment of silver investors who would buy and hold silver regardless of price (like there is for gold). Empirical evidence suggests otherwise.d) omits the aspect of silver being a finite resource ultimately being consumed. Even with higher prices (recycling incentive) and new technologies, a certain percentage of the silver used in industry is irretrievably lost, thus it is and always will be a depleting resource. No abiotic silver out there, as far as I know... ;-)e) ignores the very much active investment/speculative potential of the Chinese retail market, which for the first time is becoming a capable market of buyers as wealth has concentrated to a sufficient degree. This is just an illustration and ignore the captions, but the CCTV clip itself is instructive:http://www.youtube.com/watch?v=4rmobXfLzo4

I am likely to allocate more FRNs to physical gold purchases. Reading FOFOA has that effect on me, it seems. As soon as I MAKE some trading paper silver and after I finally round out my stash with Perth Mint silver products... :-)

Hat's off to you both for a very interesting article that I will have to re-read (as it is late, and I have had a drink or two or three)...

I would guess that the prudent physical gold / silver ratio for us as individuals would be the 1:1 ratio (WEIGHT not $ value)of gold / silver that our congenial host recommended... I am along the way...

costata, your observations from all over the production process of PMs from ore to final bars and coins have been useful and helpful to a bearing industry businessman, but a gold investor as well.

SILVER is more complicated than gold, with other than wealth preservation issues (that I am not up to speed on)...

I have changed (a part of), of my physical silver to GOLD! Viva FOFOA!

I as well buy into FOFOA's thesis that physically owned GOLD will be the BEST wealth preserver...

Speculate with silver (as I have with physical), but I believe that PHYSICAL GOLD is is without the BEST way to retain everyone's wealth in the times to come...

I think you are mistaken that the industrial silver users are a SLA ally. They do NOT need to pay the going price if they play the silver game cleverly. I come to that in a minute. However, the silver producers (miners) COULD possibly want be an ally of SLA since they would want the price of silver as high as possible to increase their margins.Now back to the industrial users.

You state that industrial silver users 'have to pay the going price'. This is not true. A clever industrial user could USE the SLV etf to their advantage and lower their costs BELOW to going price, as follows:After the complete silver price collapse in 2008, a clever industrial user knows that demand will eventually come back but has no idea how strong. He buys a little physical silver from the market. However, in addition to that he buys a decent amount of SLV LEAP options as well (!), enough for redemption in a basket to deliver physical silver.During the short squeeze of the silver market, the clever industrial user keeps buying physical silver or might redeem some of the SLV LEAPS for shares which can be folded into a basket to be redeemed for physical silver.By the time the short squeeze has run its course, the clever industrial user pulls his bids, AND SELLS the remaining SLV options/shares.As a result the total cost for the clever industrial has been reduced compared to the average price paid by competing users.

Ha! Wendy, you caught me. If you're talking about the one I think you are, I forgot about that one. Although I'm still right. It was not written for this blog. He wrote it for his own blog and I found it through my stats and co-opted it. But I did ask his permission first. :)

Long indeed but thank you nonetheless Costata. Silver has what appears to be impossible hurdles to overcome for the SLA to obtain satisfaction.

I'd like to point out that SLV redemptions have increased dramatically over the past week and the ishares website show inventory at 10253.75 tonnes, 800 tonnes less than at the time of your writing Costata. Perhaps this stock has been set loose by the corner operator to help with their price manipulation.

And according to the silverinstitute.org, last years total supply for 2010 was 1056.8 million oz, significantly higher than Sprott's number. Interesting that there is so many different supply numbers floating around.

Any thoughts on the recent massive redemptions from SLV? All time inventory high on April 25th of 11390 tonnes, shows a release of 1137 tonnes in just 9 trading days. That is a massive flow for such a short time, no?

One particular claim I have an issue with is that Costata is linking to a post that claims that there are 19 Billion oz Silver ground today while a) citing a 20 year old study and b) failing to mention that only about 2.2 Billion oz of that amount would become available at $20 / oz Silver.

Given the fact that according to the US Government Minerals Survey total above ground stockpile depletion from 1991 to 2009 was about 4.8 Billion oz - more than twice the amount deemed to become available according to the 1991 study at $20 / oz - the current price of $35 / oz seems a pretty good entry point. Especially considering that any additional stock depletion would have to come to a significantly degree from silver currently in the form of silverware and art.

The fact that the silver inventory at the CME has shrunk to only 32 Million oz makes a significant squeeze still very much in the cards.

Also the fact that the COMEX cannot be cornered is irrelevant. Once the physical silver becomes scares putting an upward pressure on price and increasing the cost to the shorts.

Sorry - I don't buy it.

Seems more of a case of 'silver envy' by an ultra gold bug to me. Don't worry people. Gold will get its time in the spotlight. Something that can not happen soon enough if you ask me.

The original US constitution mandated bimetalism, gold and silver, as money.The English Pound Sterling, the Chinese Yuan ( Yuan means silver in Chinese ) did function along side gold in the monetary systems. While gold is the penultimate form of money ( a fact that even the SLA would not dispute) those of us who BUG-OUT over both metals are hedging our bets based on history ( driving by looking in the rear view mirror I know ) Thank you FOFOA and ALL who visit. This topic needs a civilized forum for discussion.

From someone who loves silver...I appreciate the effort that you put into the post.

I am one of those folks who believe the normalized GSR should be about 60 to 1. That being based on the ratio of silver to gold that roughly exists on planet earth in our planetary crust.

We should expect to see some variation from that up or down based on supply and demand issues but if you see it swinging to far from that ratio then something is definitely out of sync.

But don't try and tell that to the silver bugs. This is a religion to them and is based on a conspiracy narrative.

I try to avoid anything where the chief reason to buy it is because of someone else's behavior.

I dumped my slv when the ratio hit 40 to 1. Traded those funds into gld. For the record. Don't worry about the gold or silver price in FRN's. Simply keep an eye on the GSR. When it hits 80 buy slv. When it hits 40 trade into gld.

I realize that this strategy doesn't address the long term demand of freegold. But if you want to trade it's a simple enough approach.

Very interesting piece. I would have liked a few paragraphs discussing silver in the context of hyperinflation, which is a primary reason for silver acquisition.

The redundancy argument is not complete. If one holds gold to preserve wealth, then yes, silver is redundant. However, those looking to accumulate must consider price and this is why silver is attractive to many people. $10 bills are not redundant because $100 bills exist.

Finally it matters greatly the purpose for which one is acquiring metals. The piece alludes to the fact that silver is a trade, I'd agree with that to extent (physical silver is also not paper). To one looking to profit statements like the one quoted from Museice saying, "I don't care how high it goes" seem asinine. Of course, they are not, but much worthless debate could be avoided by stipulating to the purpose, otherwise the argument persists because people are arguing about entirely different things.

Bimetalism in central banking is worth considering as many countries build gold holdings while others build silver holdings. Silver backed paper currencies within smaller, non-OECD countries will be a likely trend once gold is marshaled more broadly in the OECD. While I favor the FOFOA thesis I do so only up to the point that discussion surrounding the thesis of gold and silver descends into a false dilemma. Indeed, sourcing gold at some point will become difficult and that will make silver an attractive solution. Yes, silver is in many respects a Me Too monetary metal. But that's precisely the reason it too will be marshaled in various non-OECD central banking or currency regimes. This will be especially true in countries where do,domestic silver production and the political complex are aligned. I see no conflict between Freegold and a concurrent repricing of silver into a new, silver price era. The repricing of the planet continues, and I'd encourgE others to contemplate these issues throgH the lens of ecological economics. (Soddy)

I am going to go out on a limb and comment on this thread despite the abuse that Costata has heaped on me for daring to reply in the past.

It was a very good effort by Costata, better written and researched than anything I could post. It was written with a bit of a shotgun approach though.

On an earlier thread Costata said:

"4. If you want to promote a multi-metal strategy here expect to draw criticism."

It appears many of the comments here should now draw his ire, er, "criticism".

In any case I really have little problem with what Costata has written. I don't like Keiser and have never read any of the comments. I was not aware of any real grassroots movement supporting the SLA. And I certainly can see that Blythe and gang are whipping the silver market around in order to shake down weaker competition.

But where I really have a problem with this entire post is that it appears to cover the time span from the present to HI or shortly thereafter, where apparently many think that there will be a mad rush by silver owners desperate to get into gold. I am not so certain that it will unfold this way and I am not at all convinced that the opposite could not occur. Perhaps the small silver owners will run to platinum along with the small gold owners.

We are heading into unchartered waters and a likely collapse of the global economy. There will be disruptions and distortions to local economies due to revolution, civil war and world war (the first two are already happening). My biggest concern is my or my spawn's virtual enslavement by an autocracy.

My paper investments in silver are, like my paper investments in gold, of a far more speculative nature than my physical holdings of either. I would never have 100% of my wealth in physical gold unless everything else went to zero. I would also agree with dojufitz that a physical 50:50 is a very reasonable place to be, especially if the silver was purchased back when the GSR was over 60:1.

"The general point is that, people from some areas in Europe have a deeper history. Their history involves living through periods of economic and cultural collapse, as well as period of war. This has gone on for a thousand years or so.

I guess what comes from it is a deeper learning - families passing on their experiences through stories and cultural behaviour. Saving for a rainy day, stuff like that. And part of that culture is a belief in gold, and it's use as money through the ages."

Maybe I wasn't clear last time, but this is exactly what I meant by a "fallacious argument" in support of gold as a current day investment. Trust me, I understand the European cultural history. My parents are from India, and that is also a region with thousands of years of rich cultural history and traditions, many of which are still with them today... at least in certain segments of the population.

But let's cut the BS here. If you're going to verbally attack deflationists and tell them they are garbage, then at least give me a coherent and logical reason why their investment advice is faulty (Freegold and its link to HI would be an example of such an argument). Don't tell me a bunch of people outside the US have a genetic and ancestral attachment to gold because they have suffered through periods economic and political upheaval. Even if that's true (and I happen to think it's much more complicated than that), it has no logical connection to the premise that deflationist advice is horrible regarding the US dollar and gold in the next few years...

This should be self-evident... and if you say things about not trading a little bit of gold for food even if you are about to die, but don't want to be taken literally, then either make that clear or admit you have actually have no argument, and just want to attack people with some bogus emotional statements.

Desperado, you have a decent amount of history at this blog by now, and that is why there is a lot of frustration when you come back again and again. You're a smart guy, and you've had a lot of hand-holding: you really SHOULD be able to see it by now.

We are all just attempting to get you to see what we see, and when you finally do you will see the "conflict" in the proper light. I am confident you will understand our position, which is that other people attempting to understand the Freegold concept are being side-tracked and confused by your unending lack of perspective on this very specific topic. What we want you to see is very, very simple in essence. Too subtle.

Note that it is nothing personal. You will have probably noticed similar approaches with other people too (indeed, I know you have, because you have said as much before now). The interesting thing is that the wider and more detailed someone's knowledge of the 10,000 things is, the harder it is for them to see the blindingly obvious 1 that is fundamentally important.

Take the Motley Fool for example. Now there was a smart guy. So smart and so clued-up that he refused to accept for some time that perhaps he didn't really understand something very simple, but fundamentally important. He would argue for hours and clearly demonstrate how articulate and intelligent he was, and how detailed and comprehensive his knowledge was. But we could see a small but critically important detail that he hadn't considered. Of course you know as I do that like a butterfly emerging after a period of incubation, studying and navel-gazing, he has changed his perspective and has a lot more clarity and certainty in his views. He now bats on the other team.

I expect to see this also in time with the likes of Ash, pipe, etc. And you. These are smart guys. They know some stuff. At some point they will hear the click, I am certain of it. And then, their view will become more clear and they will have greater certainty about their views on many things. Ash will stop hiding in Caveat Central, deleting comments to replace words like "will" by "may" and then reposting them. He is a very skilled writer. He will be a great asset in the forum, but only once he hears the click and gets a wider perspective. When he realises he has one thing bass ackwards.

Anyway, it's still the weekend and I am not at my desk where it's easy to work. I am going to get to the reason I am commenting to you today. I am going to once again make another attempt to point you at a point of clarity from costata's post above. I hope you are enjoying the weekend...

Sincerely,

DP :-)

The gold investors also now have some extremely powerful de facto “allies” that the SLA does not. The Central Banks and Treasuries are net gold buyers again. These are fantastic allies to have. They issue their own fiat currencies so there is no objective limit to how high they can bid the price of gold. They can never “run out” of that currency either. They just need sound reasons for bidding for gold and those reasons are the raison d’etre of this blog.

FOA: Ha! Ha! The last thing a poor man (or woman) needs is silver. Actually, any metal could be a poor man's gold, even iron! One ounce of iron is more affordable than silver and has just as good a chance at outrunning gold,,, percentage wise of course. Isn't that right Randy? I saw your face back there in the group (smile).

The only real argument all the silver pushers have is based on it someday outperforming gold and holding that gain for good,,, again percentage wise. This is the same old worn out logic all the various paper gold substitute players also use. Throw it into the same waste basket with options, futures, leveraged gold contracts, delta hedging both long and short paper positions,,,,,Yea,,,, somebody forgot to mention that the next move in gold may be of a nature like "noone" has ever seen before. Oh, you didn't hear that this time the entire paper gold marketplace may crash and burn,,,, taking all those above leverage vehicles down with them? Exposing silver for the play it always truly was,,,,, just another leveraged metal being pushed to poor people standing next to gamblers?? Yea, poor people shouldn't use gold,,,, that's only reserved for rich people hedging their big wealth. Ha! I ever there was a way to increase the gap between have and have nots,,,,, just sell the nots silver while the haves keep gold.

A very well reasoned discussion Costata, thanks for your time and effort. If indeed an entity is in control of the market, it does seem to make more sense that they manipulate it both up and down rather than just suppress it, as there's more margin to profit from. On the other hand, since PM prices are somewhat connected, could silver price suppression not be used as one mechanism of gold price suppression?

I thought you were going to raise some of the evidence that the silver market is manipulated (though not necessary solely suppressed) though - not least the admission of such from Bart Chilton of the CFTC.

btw, the often-made argument that the gold-silver ratio (GSR) ought to be the same as the relative abundance of the two metals (60:1), raised above, makes no sense. Firstly, it ignores the demand side of the supply-demand equation. Secondly, as discussed by Costata, not all of the above-ground metal is equally available (supply).

Costata....It's evident how much time and effort and deep thought you've put into this essay; which is to say it's apparent why FOFOA would find your article worthy of his blog. A greatly appreciated read! Kudos!!

@DP, please do "once again make another attempt to point you at a point of clarity"

If freegold works out the way you so strongly believe and all other PM's drop to their industrial scrap value, I will certainly be okay. If however events unfold in a fashion that prevents freegold in the region where we live and possibly makes gold go into hiding and silver becomes king, even for a few years, I will also be able to survive the drought. In fact, if silver wins for even a few years, I might even better off than a direct shot from HI to freegold. In this scenario you could be forced to offload your gold to raise silver at 5:1 or even an inverse ratio, whereas I could sit on my gold and use my silver to get me through the drought. In fact, the mere spending of your gold in an illegal black market could end up causing you to land in jail or in a gulag because the giants turned out to be less benevolent than you are so certain freegold will force them to be. In this scenario my stash of 90% pre '66 francs could conceivable allow me to live very well until the counter-revolution.

"Don't tell me a bunch of people outside the US have a genetic and ancestral attachment to gold because they have suffered through periods economic and political upheaval. "

Not genetic... not ever. Ancestral, only so far as values are passed from generation to generation.

I didn't write Fauvi's comment, I just commented on it. I wouldn't say things in the same way.

Again, I wasn't having a dig at you, just making a point. It wasn't an 'anti-deflationist point'. It was a point about gold having value. When countries crumble and currencies die, gold still has value. And this value is also considered security.

To expand on J's point, silverbugs have an agenda. Max Keiser, like our own Desperado, mix their political goals and baggage with their investment decisions; a dangerous combination. End market manipulation! Return to sound money! 16:1! Kill Blythe banksters! Crush JPMorgue! That's a lot of weight for silver to carry.

The main evidence presented by silverites is a rising price, but prices of many commodities have been rising for years. As costata points out, silver shortages are highly questionable; a case can be made that corn is in as short supply, or even scarcer.

Silverbugs have presented no evidence, IMO, that bi-metallism is returning. Other than a rising price, what evidence is there that silver will be monetized?

Freegold does not require a conspiracy and there is evidence (besides a rising price) to support it. Freegold is not an agenda

For the record, I know where you are coming from and I think the people here at FOFOA's blog have a huge leg up on many others in the HI crowd - an extremely broad perspective and very well-reasoned argument.

"Ash will stop hiding in Caveat Central, deleting comments to replace words like "will" by "may" and then reposting them."

"I expect to see this also in time with the likes of Ash, pipe, etc. And you. These are smart guys. They know some stuff. At some point they will hear the click, I am certain of it."

You should drop your attitude of completely certainty, however. That's never a good thing for those trying to fundamentally understand the realistic dynamics of our global society.

I never deleted a comment and reposted it to change a single word... just another unwarranted assumption. I have written comments twice because Blogger delayed in posting the first one, and I thought it was eaten up, so I wrote it again. Naturally, a few words changed, and when I saw they were both posted, I deleted the one that did not capture my view best (which I believe was the first one).

Words like "will", "may", "likely" or "unlikely" are extremely important to this discussion, and I try to avoid the first one as much as possible.

Thanks for the reply, but I would disagree with that statement. The flippant quote about any metal being poor man's gold is silly. It ignores the properties that have made silver a monetary metal throughout history. Foremost that iron corrodes and is not scarce. Nor is physical silver equivalent to paper gold. If silver has been subject to fractional reserve practices then the physical price will rise once the fraud is expose no different than gold.

The cheapest gold my dealer has is 1/10 oz coins. Last month they were selling for $175. The cheapest gold I have seen is the one g bar going for about $60. Considering the huge premium on fractional gold I do not think it foolish whatsoever for people to buy silver instead.

The response is typical of the "silver is not gold" argument usually employed here.. I find it unsatisfactory. I just do not see how holders of physical silver will be disappointed in HI.

(sigh) Oh, Desperado. Why is it that you refuse to actually think about anything anyone ever says to you? Even on a Sunday, you must simply lash out with an immediate reply. I don't want to beat you to a pulp in an argument, I want us all to win. Who was it that said people would rather die than think...

As I've said to you in as many words before and hoped I was clear on earlier today, I am not worried about YOU. I am worried about the frightened and vulnerable shrimps, who have found their way here and are so close to understanding but you insist on getting in their way as well as your own.

Enjoy the rest of they day buddy. It'll be Monday again before you know it... ;-)

I know it wasn't you with the illogical anti-deflationist argument. But you were telling me that I hadn't "read into" Fauvi's comment properly, so I was responding to that.

I have never argued that gold doesn't or will not continue to have value in the future. I think it's much more a function of material circumstances in a community/society than ingrained ancestral ties to the metal, but the latter certainly has its influence.

Hello all and thank you for the excellent discussions. This has become my favorite site - if only based in educational needs. Since the vast amount of the general public is unaware of the dire financial circumstances we are under - I try to inform friends and relatives that the issue is not that a collapse is imminent - but on how it will transpire (De or HI) or as I assume - one working through to another. But to the average person who is so totally unprepared for either eventuality - does it really matter? If they are capable of making adjustments in their circumstance - I guess the answer is 'yes' - but.... they won't. Normalcy bias wins again.

Re: Au vs. Ag - My friend who turned me onto FoFoA is the only one who I can really talk to about this and we share opinions - generally influencing each other. Our goal is 75%-25% ratio of Gold to Silver physical holdings. We both have more silver at present... and have profited from it. He is, more recently moving over to Gold. When I ask him how much he has in total - his response is always 'in Gold' - ex "I have the equivalent of 100oz of Gold". He is far better off than I.

As the percentage of people who own physical is so small (less than 1%) I don't see the scenario that one neighbour would be fighting to sell his silver ahead of another. That seems absurd. The 'enemy' will be all those that are without (food, water, gas, heat, previous wealth etc.) with no way of obtaining.

After Costata's dissertation - there are question(s) to raise that are totally $$ related. Will the monetary metals (Au, Ag) go up when TSHTF? Costata seems to paint a picture where Silver is abundant (everyone has a truckload) and it will be virtually worthless. This smells of a Gold bias, no?Okay. Will one monetary metal outperform the other?Of course - will it be Gold in the long term. I think most would agree - YES!Will Gold outperform Silver next week? ____Next month? ____This Year? ____This is the risk, no? And we are aware - and act accordingly.Up until last week - it was funny how hushed Silver naysayers were here at FoFoA. I guess the proof is in the pudding. Yea - they existed and 'the man' himself gave a few digs but nothing like Costata's excellent piece. Perhaps they were waiting in the wings. Interesting.Peace.

Ash, I hate to break it to you so publicly my friend, but I have a copy of both your comments. I can post them if you insist, but I don't really want to bother because we both know it's unnecessary.

By a quirk of the way I am setup, I see deleted comments and also those held up in Spam Valley. So whenever people, say, put up a comment with their wrong persona, delete it and then put it up under another name, I know that too. ;-)

There is nothing really special about my setup, so I won't be the only one that knows what I said earlier was true.

FOA addressed many silverbug arguments on the gold trail. To understand silver it is necessary to grasp freegold. Here is another taste.

FOA: That day, when gold first hits $5,000,,,, we will all see something "not as before". You see, price inflation will not be the initial driving factor for gold. No, it will be a realignment of the gold price discovery system. There,,,, in that destruction of paper,,,,, anything with leveraged perception attached will tarnish,,,, silver included (smile). Then,,,, after that value adjustment,,,,, all hard and real assets like gold, silver, real estate, oil, natural gas, soap, etc.,,,,,,,, will be at the starting gate of the great dollar inflation race. The gun will fire and we will all run the trail. In that environment, none of us will "AFFORD" anything of hard value. We will, however trade for what holds value the best,,,, not what gains currency price the fastest or the most-est. Gold, with the greatest history of holding the highest numerical value of world wealth in lieu of assets,,,, will outrun any and all contenders. And do so from a new higher level.

At the flea market, you will, along with others bring boxes of silver and wallets of currency for trade. But, the least discount for real trading value against "real use economic goods" will belong, always, to gold.

and: For the first time,,,,,,,, our industrial production, along with the demand for industrial metals like silver, will fall away even as hyper inflation in prices takes hold.

For the first time,,,,,,,, demonstrating that no other asset is equal to gold, even though promoted to be!

When the coming paper illusion price of gold is destroyed, sending its trading price way up and way down, several times, before shutdown,,,,,,,,,,,,,, the thinner paper markets of lesser metals will be absolutely devastated. Yes we will see $50.00 silver in our time,,,,,, $50.00 for a hundred ounce bar,,,,, that is! No less a relative price decline for the other metals is in store. Even if theseactual dollar numbers prove incorrect,,,,,, relative inflation adjusted prices will show the exact same ratios to gold. The gain will truly be in gold!

This failure of price matching,,,,, this failure of contract conversion into metal,,,,,, this failure in the world gold market to any longer be able to correctly price real bullion,,,,,, will lead to a wholesale dumping of all dollar contracts that have US based performance,,,,,,and start a fall away of all dealings based on present protocols dollar market gold exchange.

As a side note: This will not apply to the paper silver markets as silver will not have the Euro vs. Dollar political struggle. A struggle where the ECB members are trying to loosen their main asset (gold) as a reserve wealth backing to replace the massive loss of dollar reserves. Remember, further back on the trail we covered how these reserve dollars will be simply cast down. In this light, silver trading will bear the brunt of selling in an effort to balance loses from a gold exchange that no longer works. Because silver has no hope of an official free market, it's paper pricing system may run amuck until it's price plunges to???

It seems FOFOA suggests that without their policies, we would have a deflationary collapse, and that's why they have no choice but to pursue those policies, and that inevitably reverses the deflationary scenario and contributed to HI. I believe they are more helpless to reverse a deflationary collapse, but they do have the policy tools to slow it down for awhile and micro-manage it to almost their sole benefit... at least during that time period.

Ash, you are confusing real and nominal.

"Currency is the key!...

Hyperinflation (a currency event as Jim Sinclair so eloquently tells us) is always concurrent with deflation (economic malaise) when measured in real terms (gold). The dollar is only paper, and it is being printed like crazy. So to measure things in dollars becomes very confusing when looking to the future."

Please read the rest of the 4 part response I made to RLP in the last thread regarding the difference between Iceland, which couldn't print, and the U.S., which can. Its largely the same forces at work, but one can change the numéraire (denominator) of the debt (the dollar).

The credibility deflation will continue and credit will deflate. We will experience economic malaise in real terms. But currency is nominal!

"...This is the deflationary collapse scenario. This solution for changing debt into equity preserves the sanctity of the senior debt holder (only to the extent of the true value of the physical assets) and the numéraire (denominator) of the debt (the dollar)..."

"If you are the world's largest engine of easy and casual debt creation and also the maker of the paper that denominates it, there is another way to default. And there is another kind of default the market can anticipate. Devaluation!

Another threat of extreme instability in a debt-based system is the chain reaction effect. Almost every entity that issues its own debt also holds the debt instruments of other entities as its reserves. So when one large entity defaults, the falling domino effect can be systemically catastrophic. And to complicate things even more, the methods of stemming systemically catastrophic consequences themselves have an even worse systemically catastrophic outcome; the collapse of the numéraire..."

"...Deflation?

If today's deflationists are correct then the numéraire will remain strong or even grow stronger while the world runs from equity ownership of the physical world into the warm embrace of casual debt creation stabilized by its own Ponzi-like exponential growth pattern.

Think it through. We don't just muddle through from here. We either shift toward equity or debt. We are currently not in stasis.

Perhaps at some point the Fed would like to crash the equity markets in order to drive you into its warm (debt) embrace. As someone from London once said, wash, rinse, repeat. Right? Will this be enough to convince Mr. Market to give up on equity positions? Could a stunt like this be enough to convince a world full of realists, producers and savers to hand their claims on real property over to the paper pushers in exchange for a signature?

For those of you who can't already see the obvious answer, as Another once said, "time will prove all things."..."

I think for those of us like me that love gambling and continue to speculate in the market, the biggest issue with freegold is timing, especially since we are 14 years post Another. So are there any predictions as to the year HI unfolds?

Could you expound more on the difference between paper gold and silver markets? I tend to view them as the same, subject to fractional reserve practices, etc. I read elsewhere that the price divergence in physical v. paper could happen sooner in silver rather than gold because there were not the big players like central banks, holding silver to manage its price. If that understanding is wrong, I will have to reevaluate my position, but I would like more information if you are able to provide it.

I am also curious as to how many of the old USAgold folks have transitioned to FOFOA? The only person I have seen mention being there is Art. I've seen speculation that Another is passed on, but what about FOA, Aristotle, etc?

I honestly don't remember ever doing that... I only remember writing posts several times because I thought they had disappeared. Since I am not that hard-headed, one time I copied the post into notepad before I hit publish, and when it didn't appear to come up I copied it back in and perhaps I changed a word.

Either way, I'm just telling you that I would never delete a comment and re-post it to change a single word. That would never be my intent, which should be evidenced by the fact that I have posted entire sentences with a correction in a separate post, leaving the flawed sentence up (my post to FOFOA).

JR,

"The credibility deflation will continue and credit will deflate. We will experience economic malaise in real terms. But currency is nominal!"

But the credit is denominated in the currency, as FOFOA says in that Metamorphosis piece.

FOFOA: "If today's deflationists are correct then the numéraire will remain strong or even grow stronger while the world runs from equity ownership of the physical world into the warm embrace of casual debt creation stabilized by its own Ponzi-like exponential growth pattern."

This is what I expect many will do, but not because they are seeking "warm embrace". Think about someone who is thirsty/starving and decides to rob/kill other people to get their stores of water and food. It is not necessarily because they feel good or secure about it, it's because they have feel that they have no other option.

Either pay your debts, or lose your home, car, wages, whatever. The point is that central structures of a ponzi-scheme on this scale can hold out a lot longer than we would expect, especially when siphoning off capital from low to mid-level players in the scheme and letting them get wiped out.

FOFOA: "Perhaps at some point the Fed would like to crash the equity markets in order to drive you into its warm (debt) embrace. As someone from London once said, wash, rinse, repeat. Right? Will this be enough to convince Mr. Market to give up on equity positions? Could a stunt like this be enough to convince a world full of realists, producers and savers to hand their claims on real property over to the paper pushers in exchange for a signature?"

Yes, it could be for some significant period of time. Not necessarily a market crash by itself, but in combination with bond wipe outs in other sectors and parts of the world.

"They are not under the illusion that the U.S. treasury or currency markets are sparkly diamonds in the rough, or even shined shit in the land of fool's gold. Fundamentally, the dollar is no healthier than the euro and they know it. The choice, however, is whether to wholly abandon the treasury shell game between the federal government, the Fed and private banks or to keep a good thing going while it seems to be working. They are banking on the Fed's monetary operations, political illusions (the appearance of two parties working towards reducing the deficit), panicked "flights to safety"and a little bit of luck to preserve the debt-dollar system until global markets "reset" and economies begin to grow once again.

Perhaps they will keep other options open, as lifeboats to hop into in the last second before the Treasury Titanic is fully submerged. The problem for them is that such backup options never really end up working out as planned, especially when time is not on the same side as you are. It is also a distinct possibility that, despite what anyone wants or plans, the treasury market will blow its lid sky high next month or the month after. Possible, but not very likely, given the current situation in global bond markets and the "full court press" that is being launched by the elites. Personally, I give the treasury market and the dollar at least a few more years before their shine truly wears off, and the fan has its way with them."

"Instead, the U.S. dollar and Treasury bond, because of their fundamental weakness, will be the refuge of choice and design, and this will also serve to aid the Fed's Mafioso protection scheme for controlling rates. The world has been flooded with dollar-denominated debt for decades, right up until now, and soon all of those liabilities will come pounding on the front door. And who will answer? Why, the Fed and the financial elites, of course.

They will invite the debt deflation in with open arms, because now they are holding vast sums of cash, and Treasury bonds that simply cannot go bad. It will simultaneously be used as a justification for "gradual" austerity measures targeted at the middle and lower classes, as the public deficit will remain elevated to finance further bailouts of the financial elite class and brutal military operations for resources. The insidious shell game and unprecedented transfer of wealth will continue on, at least for some significant period of time, before the fires set by the elites burn out of control and finally engulf them.

Ash: But the credit is denominated in the currency, as FOFOA says in that Metamorphosis piece.

Exactly.

So, when there is deflation, which we agree on, what will everything be deflated against? Currency? How can TPTB have pretty much all their creaking nominal currency credits come out "whole", given the nature of the moving parts they can play around with in this system? Try forgetting about the Fed when you think about TBTB (there is a whole ROW out there after all; there is not only a US PTB) Perhaps a little quiet time alone with the ECB consolidated statement on their website will be illuminating, who knows?

Ommmmm.... (what is that annoying tinkling sound again? can you hear it too?)

DP: "How can TPTB have pretty much all their creaking nominal currency credits come out "whole", given the nature of the moving parts they can play around with in this system?"

They can't and they won't... that's the point. I agree with FOFOA, though, that they will have first access to real assets, just not necessarily for the same reasons. I haven't said that the ECB/BIS won't use gold to recapitalize parts of the European banking sector, although I don't think they will be able to retain the current monetary/political structure under the EU. A lot of imaginary credit-based capital will be wiped out, never to be recovered again. I also think the transition will be a very messy process, and I don't think the initial stages will necessarily force global dollar holders to follow suit... in fact it may do the opposite.

TPTB shouldn't be thought of in terms of any political organization, whether that be the US, China or the EU. It's a bit ironic, isn't it? That you advise other people not to ignore the ROW while you ignore the rest of the apolitical systems on Earth that ultimately drive all political developments in every nation.

What I really like about this post is its timing. For how long before it was posted did you have it finished (or at least mostly finished, ignoring small tweaks in the interim)?

I noticed many questions to Edwardo during the silver parabolic spike, regarding silver inventory at dealers in the mid 40s price range. Plus a marked drop in engagement with silverites for a time before you clicked send.

You didn't happen to entirely expect, predict and understand this collapse in its proper context and timeframe, preparing, then unleashing your message with precision timing for full effect now did you?

Okay DP, I am certain I misunderstand Act 2. Now please answer some of these questions about Act 2:

Do all fiat currencies collapse including the Euro, or just the dollar? What happens to the PIGS, do they manage to keep their gold despite defaulting on all their debts to their EU neighbors? Can Switzerland resist debasing the franc when it doubles in value compared to the Euro or at least the PIGS currency? Does the Mexican Peso survive the HI and still resist using a silver commodity backed currency? After Iran starts a war with Saudi Arabia and the Saudis, Kuwaitis, Jordinians, and Israelis flood the market with gold and the GSR goes to 5:1 what will oil price in oz/barrel be?

You freegolders cannot argue these points because guess what, you aren't oracles. I don't have to proove I am an oracle, because I don't claim to know act 2. You are so certain that you know act 2 that you smear anyone who disagrees as "not understanding freegold". Echos of costata. It is like trying to ask as Keynsian "what happens if the stimulus doesn't work".

DP writes: "Ash, I hate to break it to you so publicly my friend, but I have a copy of both your comments. I can post them if you insist, but I don't really want to bother because we both know it's unnecessary.

By a quirk of the way I am setup, I see deleted comments and also those held up in Spam Valley. So whenever people, say, put up a comment with their wrong persona, delete it and then put it up under another name, I know that too. ;-)"

Hyperinflation (a currency event as Jim Sinclair so eloquently tells us) is always concurrent with deflation (economic malaise) when measured in real terms (gold). The dollar is only paper, and it is being printed like crazy. So to measure things in dollars becomes very confusing when looking to the future."

Its clear you are here to defend your position instead of hearing FOFOA's ideas, so here is a parting idea. You say:

I agree with FOFOA, though, that they will have first access to real assets, just not necessarily for the same reasons.

"Another threat of extreme instability in a debt-based system is the chain reaction effect. Almost every entity that issues its own debt also holds the debt instruments of other entities as its reserves. So when one large entity defaults, the falling domino effect can be systemically catastrophic. And to complicate things even more, the methods of stemming systemically catastrophic consequences themselves have an even worse systemically catastrophic outcome; the collapse of the numéraire..."

How else can they respond to the ever growing collapse in confidence in $IMFS?

There's your problem with Freegold you mean, that big question mark in the middle.

******All,

There seem to be some misperceptions about Freegold which I infer from statements like "if Freegold happens there" and "silver backed currency here, gold there" type of thing.

If Freegold occurs, it occurs everywhere or nowhere.There are no other options. If a bid is made, the exchange rate cannot be legislated against. Arbitrage ensures it is a global market. Any region trying to stop the process would experience capital flight on a ridiculous scale.

If you don't understand this, you don't understand why it is inevitable. Only one metal will enjoy this function, and it will be a unique occurrence. There is no precedent, nor will there be a repeat.

******Nominal = denominated in dollars.Real = denominated in value.

Things appear quite different depending upon how one chooses to view them.

1) All currencies will collapse, the euro too. They are all just as bad. The reset may be organised in order to avoid a global shutdown.2) The PIGS will not sell any gold, they will be kept by force in the EMU. Paper will be printed, repression will get stronger.3) Switzerland is almost part of the EU, only sheeple believe it is independent.4) Mexico – no idea, but I don’t think they are not part of the system. 5) Why should the Arabs sell gold? Have they done that before? As about the Israelis, you must be joking!

Costata,

Very well researched essay indeed. However for very skilled people silver has been a great opportunity to trade for gold. I am no speculator and need my time for other things too.

I thought this was an excellent piece, Costata. It covered a lot of territory, addressed many, perhaps all, of the pertinent issues relating to silver's present condition, and managed to do so while admitting that our knowledge of certain key items, i.e. how much above ground silver exists, is open to debate.

Is there plenty silver actually? When there is backwardation there's shortage. Otherwise the big physical owners can make easy money off the spread. The fact the backwardation not only persists but intensifies after 3 months tells us there ain't plenty silver around at the current price level.

Is COMEX silver trading a big deal? It's big enough. The net short positions amount to 200+ million OZs while there are estimated only a little over 1 billion OZs of bullions for investment in the world. When you are net-shorting 20% of known stockpileIf you are a big factor. If COMEX only accounts for 5% silver business then the other 95% must be paper farce as well.

Would lots of scrap come up then? It could but then again this argument has been around since silver broke through 10/OZ. Scraps are after all scraps, they ain't mining output that keeps coming. Scraps' impact is temporary and minor.

What about recycling? This is the key but I don't know the details. Hard to research the recycling likelihood for all kinds of silver usages. Hopefully there's an effective way to recycle it otherwise we'd shamefully run out of silver someday.

Why was there a bi-metal system? First of all money, be it for store of value or medium of exchange, should always be hard-asset based. No, that "separating store of wealth from medium of exchange" idea does not fly. Sorry. It's not this stubborn Rui constantly attacking it. Saudis in that Petro-Gold story by Another apparently did not buy it either.

Neither do such assumptions as "people love soft money", "we all have to borrow in modern world", etc that FG theory banks on hold much water.

It's a natural selection in the hard money world that gold and silver are used as money: Gold for international trade and store of wealth for the rich due to storage advantages over silver, and silver for daily local commerce due to its abundance. In some nations with big population like China not even silver was abundant enough so they minted bronze coins for circulation.

By "hard-asset" I mean a monetary system without rampant fractional reserve fraud in it. Why is that a credible system? B/c it offers tough love. Yeah, a monetary system has to have tough love in it. Growing an economy is like raising your kids: You love them but you don't spoil them. If you make everything easily available for them you weaken their ability to live on their own.

"What do you want, son? A new iPad? Fine, if you score straight A's this semester I buy you one."

Economy is of the same thing. Money should be earned from hard work rather than borrowing from home equity or credit card checks. You want some money? Work hard and show me you are worth it then I'll pay you some. No free lunch. When hard money is replaced with constantly dilutable FIAT and the control is given to the agenda-driven politicians and bankers, it becomes corruption and at the end a collapse.

A few more words on the myth about "giants". Euro system was designed and ran by the "giants" as the enhanced monetary system to encompass the entire world going forward, right? If just the inclusion of PIIGS is about to melt it down what would happen when the mega PIIGS - United States - is thrown into the mix? Were I you I'd consider getting off the giants' bandwagon for a while giving their inability to steer own flag-ship straight.

radix46, no need for that kind of tone. That was certainly the connotation in one of the articles linked by Costata. I am simply pointing out that that particular fact has been gotten wrong. That's all.

Seriously, I have explained my position to you numerous times, and responded to the quotes you keep posting from FOFOA. If you are going to say the same thing over and over again, regardless of my detailed responses, then there's no point having this discussion, is there?

I'll make it very simple one last time - The debt obligations are denominated in dollars, so when the liabilities mature, they must be paid back in dollars. If you don't pay your mortgage, you are likely to lose your home...simple, right?

That leads to an increase in the real purchasing power of the dollar (debt deflation), but at the systemic level, there is a shortage of cash, because much of it has been concentrated in top few % of our population.

If you happen to be one of those lucky few, like FOFOA's friend who owns a bee farm and what not along with a lot of excess cash, then deflation will give you the opportunity to purchase real assets for pennies on the dollar value of what they are currently worth. If not, then you may have a bit of a problem...

The politically connected financial institutions can either dump their debt-assets for cash/Treasuries or use them to exercise their rights of foreclosure on real assets, or some combination of both. Energy companies and defense contractors will get constant subsidies from the federal government, no matter what. Every aspect of traditionally government functions will be privatized to generate commissions, fees, etc. as the taxpayers watch their public assets disappear in the name of austerity.

They are both greedy and have a large degree of political control, but that doesn't mean they can determine long-term financial outcomes. Please, try to remember the key point here, which is that timing is everything.

It is funny to read all of you silver bashers. I understand it is because you believe only gold is money. But you are just a small amount of the population. The Chinese, The Indians, The Asians, and The Americans until 1964 think of silver as money too. In fact, silver lasted longer in the U.S. monetary system than gold so more Americans are actually accustomed to silver as money than as gold.

There doesn't have to be "just one metal" for money. Historically, there have been two of them.

Someone here posted that there is 60 times as much silver as gold. Last year there was 9 times more silver mined than gold. This equates to a 9 to 1 gold to silver ratio.

There is more available gold for investment on the planet than there is available silver for investment. About 5 Billion ounces of Gold compared to 2 Billion ounces of silver.

The reason people are buying gold and silver is because governments are printing too much "paper" money. This is called inflation.

History has shown again and again that in high liquidity inflationary times, silver outperforms gold. Just like it has been so far. Gold has come up from 300 to 1500. Silver has come up from 5 to 50.

Those of you sitting here being smug about your gold holdings being better than my silver holdings have made less fiat shit currency than me so far.

Gold is MONEY. Silver is MONEY. Fiat currency is NOT MONEY.

I would advise all to own some of each metal. That way you won't lose.

You only have fiat excrement when you sell your metal. Then you have a choice what to do with the excrement. So if your holding the metal all you have are ounces. It sounds like you are measuring something you don't have unless I'm wrong and you sold your silver.

DP: "Ash, I hate to break it to you so publicly my friend, but I have a copy of both your comments. I can post them if you insist, but I don't really want to bother because we both know it's unnecessary.

By a quirk of the way I am setup, I see deleted comments and also those held up in Spam Valley. So whenever people, say, put up a comment with their wrong persona, delete it and then put it up under another name, I know that too. ;-)"

DP I do hope that those remarks were coming from someone who was drunk and talking stupid!!!

After a second reading of Costata's article - I am started to question 'why was it written'?To dissuade Silver holders? But why would he care/bother to do that?And, like the death of Bin Laden, why NOW?Is Silver the reason for the recent drop in Gold?I don't know - I don't think so - although they often follow price patterns. Personally, I don't consider Gold and Silver 'competitors'. I consider the dollar and the 2 monetary metals as direct competitors. But if someone, say a heavy Gold Bug - maybe a FreeGold'er, did consider Silver as holding back the dominance of Gold. The white metal may be looked at with a sense of derision. "Did that frigg'in Silver bring down Gold?" or "Yeah - that stupid Silver has had a great ride (that I missed) but Gold will have its day" or maybe simply 'Hey FoFoa, let's kick Silver while it's down!' (although you hopefully call him by name).

"...you will see that I’m not without competition in the weaving of stories about silver and the silver market."

Will we? Well, thank you for identifying our observations - prior to us reaching them.

Now. Others have mentioned what you did not Costata. The unheard of 'NO substantial physical deliveries from the Comex recently' Highly unusual, no? - but what about the dramatic backwardation? Don't both climb well above your many well researched comments that, btw, were solid fact checking but not all individually supportive of your thesis. Just more debatable points about 'above ground Silver for investment' amounts, the GSR - that neither can be categorically proven. Your bias just seems to suit your thesis - very convenient. Shortages? Canadian, Perth? Silver Eagles? I had a 5 week wait to get my 100oz bar...When the price dropped last week, I went to Kitco to buy - hmmm... NO Silver Eagles, NO Silver Maples - odd. And only a few weeks back APMEX was offering to buy our Silver Eagles at $3-$5 over spot?!? (Gee, doesn't that mean the 'spot' is wrong?)I don't recall any Gold experts bashing Silver like this. I again wonder, why?

Hypothetically, why would JPM short the Silver price? maybe, because they can do it over and over again. Profiting each time. Now that sounds like a bank.

Sorry, I am more convinced that this article is 'Silver Schadenfreude' and I am no longer giving any willing suspension of disbelief.

P.S. Disclosure - I don't consider myself a Silver Bug - but do own some Au and Ag.

My understanding is that the article was written to explain to silver bugs the folly of the expectation of price inflation.

We get a lot of silver bugs on this blog, and so often the reasoning provided is "but silver has been doing better than gold". So, Costata has taken the time to give his explanation of why the Silver market is acting the way it is.

Rather than be upset by it, doesn't it provide some useful info? I thought it was really good.

Costata, excellent analysis. When I read you essay, I was struck by the similarity to a post by an former oil insider Chris Cook about oil manipulation, see this link.Oil: the Market is the Manipulation by Chris Cook It provides another interesting backdrop, with many common threads to the silver market manipulation. Well worth a look, if slightly off topic.

Very persuasive. I will now have to sell my silver. Also there is the moral aspect of hoarding a useful commodity. Considering the health care uses for silver and likely future uses, hoarding the white metal is unethical.

Gold/Silver/FRN's, all methods of exchange. Exchange of energy.It's hard not to become addicted to the drama huh! Takes alot of emotional energy though :)And yet again another duality seems to be forming Gold vs Silver.An irrational mind would put all their eggs in one basket!

"If Freegold occurs, it occurs everywhere or nowhere.There are no other options. If a bid is made, the exchange rate cannot be legislated against. Arbitrage ensures it is a global market."

So one day we will have raging HI in the dollar and perhaps several other currencies and then poof, freegold with perfect gold markets under perfect arbitrage. Instantaneous all or nothing. The entire worlds elite will to come to the simultaneous revelation that freegold is the only solution.

Blondie you have avoided the question mark under Act 2 by simply defining it away.

"Any region trying to stop the process would experience capital flight on a ridiculous scale."

One word: capital controls. It's been done before, don't think it won't be done once more.

I appreciate your effort. I have to say, however, that I fully second Desperado:

> If freegold works out the way you so strongly believe and all other PM's drop to their industrial scrap value, > I will certainly be okay. If however events unfold in a fashion that prevents freegold in the region where we live and > possibly makes gold go into hiding and silver becomes king, even for a few years, I will also be able to survive the drought. > In fact, if silver wins for even a few years, I might even better off than a direct shot from HI to freegold. [...]> In fact, the mere spending of your gold in an illegal black market could end up causing you to land in jail or in a gulag > because the giants turned out to be less benevolent than you are so certain freegold will force them to be. [...]

In fact, I think, these casual five sentences of Desperado are perfectly sufficient to unhinge your entire five pages.

To put things into context, let us recall that Another (somewhat) and FOA (especially) have turned out to be wrong in a few cases.

They thought that the dollar would fall because the physical gold market had been cornered in 1996/97 and the bullion banks would spectacularly fail in a run on the (bullion part of the) bank shortly after, dethroning the dollar as the world reserve currency.

Did this happen? It must have escaped my attention. Why did the bullion banks not fail? Not to this date. Not in the biggest ever financial crisis of 2007/08.

Could it be true that the CBs bailed out the bullion banks with all the known gold sales in 1997-2002 (plus some so far unknown ones)? Is it possible that this bailout actually worked and that the bullion banks are safe for now?

Why did Another and FOA stop posting? Because they realized that the European CBs are on the wrong side and that things would not play out as they had expected (dreamt)? The bullion banks are safe, and the US dollar market for gold and paper gold will be up and running for quite a while - rising prices or not.

If this is true, it will still be very good to own physical gold, but the future events might play out quite differently from what you are thinking (hoping, dreaming).

The wise man in this forum is in fact Desperado. He is not so foolish as to say I am 100% sure. By the way, where else did I recently hear these words?

On the subject of "the poor man's" gold; I ask, what is heavier? A pound of stones or a pound of feathers? I recently traded some silver for gold. I didn't have enough to buy an oz, or 1/2, so I traded for 10grams of gold. You can buy as little as 1 gram of gold.

That's high praise coming from someone with your level of expertise in these metals and markets. I appreciate the detail about the Mints unavoidably telegraphing retail purchases to the BBs.

I completely missed that connection you point out about industrial silver user hedging. Once again thank you. That fills a big hole in my narrative.

If you don't mind I'm going to borrow that spider web analogy. It fits perfectly with the angle I tried to take in this post. If you posit a single "corner" operator it is one huge spider and one huge web.

If it is a group of "like minded BBs" then we have a number of spiders each with their own web. They don't need to collude except in so far as their interests are aligned against their prey. They want their "environment" to be favourable eg. the regulatory framework. Their actions would just be a case of the spiders doing what comes natural to spiders.

If on the other hand it is Blythe Danner's handiwork we could drop her a line and ask her politely to stop rigging the market.

I really enjoyed reading the Ben Davies report that you posted. It hit my intray just before the post went up. I considered referring to it but decided against it.

I try to read everything that Ben Davies writes. I was hoping someone else would quote it here. It's well worth the reading time IMHO.

Thank you. I tried to be careful not to suggest any direction for the price of silver and the GSR. FWIW I think there will be plenty of volatility in both directions before this is over. A savvy trader could do very well. Good luck with your trading.

I believe your argument stands on a wrong premise. You think that "only one monetary metal is needed for the new monetary system. That metal would be stored and we would only need electrónic transactions." That premise implies COUNTERPARTY RISK. After this system collapses, common people will no longer trust vaults, banks, notes, government. They will demand real money in their hands. Thats how silver AND gold end up playing their históric role!

Thanks for your remarks. I'd like to pick up on a couple of your points.

Firstly, regarding gold, I wasn't joking in this post when I said that the monetization of silver would make gold worthless. Silver could underpin a new monetary system if they reserved the mine supply for the industrial users and allowed the aboveground stock to be monetized.

However as anyone who has read this blog for a while knows. Some of the folks here believe that the decision has already been made that it will be gold which recapitalizes the system.

I didn't feel the need to discuss the rarity issue or relative rarity of these two metals. There is enough silver to do the job. IMO there is enough hype on this issue coming from some sections of the silver bug community already.

I agree that China is a wild card in this situation. I would like to hear a credible explanation for their inclusion of silver in the mix. Here are two links that present a couple of possible answers to the question: Why silver?

A huge, poor, rural population and a relatively under-developed banking network like India:http://www.caseyresearch.com/editorial.php?page=articles/when-gold-necklace-isnt-jewelry&ppref=CRX228ED0511A

Jeff: Is there much interest in buying silver?

Shanta: The key is gold. The rich and middle class normally buy gold, not silver. Silver is very common among the poor class, so if you are not rich, then you will buy silver. The poor people buy silver for the same reason the middle class buy gold.

There may be another reason why the Chinese are stockpiling metal. To get around lending restrictions imposed on their banks by Beijing. This piece discusses Michael Pettis' observations about copper stockpiling in China.

I wish everyone well in the outcome of their investment decisions. One of the reasons that I wrote this post was my disgust with some of the reckless claims coming from some segments of the silver bug community. Especially their treatment of newbies. There were other reasons as well of course.

I agree with your scenario. I also noted Bron's observation that the BBs also advise industrial users and execute their hedging strategies. I guess the macro point is that overall the industrial users were running scared. At times like that the CFO is calling the shots. When "cash is king" anyone who wants to keep their job cuts hard when the CFO yells: "Cash. Now."

Thank you for the SLV stats. I tried to make the case that we have very little idea of the true position of the BBs. However those SLV numbers stink like week old fish given recent events in the silver market. The problem is that they don't tell us why or how those numbers factor in.

As I said to CD silver could do the job. I would go further and say that if it was silver plus Real Bills it would be a vastly superior monetary system for "the people" than the Euro Freegold-RPG architecture. But here (mostly) we talk of what we think will be not what we wish for. I think there is zero chance of silver displacing gold in this 'game'.

Gold serves only as a store of value (money) and without that function would be rendered worthless, a trinket - you detail this argument very eloquently yourself, in the above piece.

Silver has a dual role as money and through its increasing industrial utility.

Some of the head winds for silver are tail winds for gold and that goes some way to explaining the long standing currency valuation differential Au oz for Ag oz.

However, to decry silver as the wrong metal is to miss the reality of the situation. If the rumours are correct Mexico is looking to issue silver coins again - why? Libya's dirham and dinar are a bi-metallic standard - why? History has gold AND silver as money throughout the ages - why? And why would you expect that this would not be the case going forward??

If Bill Still is correct future money should be based on something with no intrinsic value at all, as its only the quantity of money in circulation that matters. He argues that basing money on any commodity is a recipe for disaster as that commodity can be quickly cornered by the elite. Although I cannot see this happening, if the powers that be listen to him, gold would be rendered valueless but silver would still be worth something due to its industrial applications. That's an insurance that gold does not offer its owners and leaves gold somewhat vulnerable to a very sharp devaluation if Bills ideas are adopted - this is golds Achilles Heel.

Both metals offer comparative advantages and disadvantages. For me golds strength comes from its favoured status by the elite. Silvers strength from its dual industrial/monetary functionality. Both are used as money throughout the world and there's no reason why this shouldn't continue in the future.

Personally, I'm looking to accumulate both and will be using swings in comparative value to assist in my accumulation efforts.

Thank you. I'm not sure what the "right" level for the GSR is or even if the GSR has any real meaning outside of the gold and silver markets. I am, however, confident that it would figure strongly in a strategy to manipulate these markets.

I think it was Trader Dan who once said that 'you may not believe in technical analysis, but others do'. Meaning that in trading you have to pay attention to things that other traders pay attention to.

Gold has the potential to store an almost infinite quantity of wealth (aka stock of value), much more than humanity will produce in thousands of years, and as such there is no requirement for a second store or bimetallic system.

******Costata has above outlined a theory on possible drivers of the silver market, and done so in a way which is consistent with both what has happened and with what we would expect as Freegold is born.To readers not already au fait with the ins and outs of Freegold (and let’s be frank, there are not many) much of Costata’s analysis may appear a little hard on silver. However Costata points out in comments above that he considers silver in conjunction with Real Bills would work better, but it is Freegold that actually will happen.

One cannot properly exclude the possibility that Costata may be correct if one is not au fait with his perspective. To dismiss without understanding in context is the reader’s (and the commenter’s) prerogative however, a prerogative all too regularly exercised.

The electronic money market run in Sept 2008 was halted only by temporarily freezing the market and announcing that all accounts were now Federally insured.

Here in NZ the Governer of the Reserve Bank immediately called the Prime Minister, who was about to make a public address on an entirely unrelated topic, to tell her that she must announce a local equivalent of this insurance at once (which she did only 10 minutes later) or witness capital flight on a devastating scale to insured accounts. This was done all over the world.

A Freegold establishing bid for unencumbered gold does exactly the same thing. Capital moves to where it is safe. Gold.

******”...you have avoided the question mark under Act 2 by simply defining it away.“

I have not avoided the question mark at all: it represents your inability to understand Freegold. The fact that you comment under the delusion that you do just makes the question mark larger.

Desperado; I do not know for others but for me it is not "theirs" against "mine" views but rather it is a set of parallel scenarios from which FG is constantly getting highest percentage points based on long term observations. For a reference your view is included as well. I do not take A,FOA as authorities, on the contrary, their point of view must be checked against day to day reality and past evidence. But lets not get confused by narrow view and eliminate our ourselves into "if"s and assumptions of assumptions. Facts are clear and they speak the best for themselves. CBs are the market maker leaders in the monetary issues. Their "monetary gold was awoken" as a reserve asset this time, you can read it everywhere.

"If it is a group of "like minded BBs" then we have a number of spiders each with their own web. They don't need to collude except in so far as their interests are aligned against their prey."

Worth also keeping in mind that while BBs interests can be aligned, they are also competitors so there is a tension there. One BB does not have all the information on the market, so internal views on the way to play the market can differ between BB depending on what intel they are getting.

Has anyone read 'Pieces of Eight' by Edwin Vieira, Jr.? James Turk's GoldMoney Foundation has sponsored a recent special edition. One can't speak about monetary silver without consideration of this tome.

A profound, comprehensive, and unprecedented work that I am making my way through.

First of all, an apology. I feel that you will have been impatiently awaiting my response to your list of questions, but I awarded myself Sunday evening off to spend it with my long-suffering wife. Then this morning I had to take one of my young kids to hospital first thing, deal with some odds and ends for those pesky paying clients, before I could finally catch up with the comments here again. So I apologise for keeping you waiting; especially in light of the fact I am specifically not even going to answer all your questions! ;->

Now, I do not wish this to turn into a long and winding essay, leaving you unclear on what I am trying to say. I like to, as I said yesterday, use as few words as I can while still ensuring as many people as possible understand the intended meaning of those words; what context they should be read in. So, you will have noticed that I am resorting to using some silly links again I'm afraid. I'm sorry about that, but IMO it's in your best interests. I am assuming you are taking the trouble to lookup the lyrics online, if you can't hear them, for any of the tracks I have been sending you -- because I have taken great care in picking the songs and I have just assumed you would have listened to what those other people had to say on my behalf.

Anyway, onwards and upwards -- let's forget the filler and get to the beef, eh? ;-)

I am going to focus only on your first question. Because this *IS* "Act 2", in my view. The rest of your questions, if they are ever to be relevant at all in the first place, will be reactions to "Act 2". They will form early scenes withing "Act 3", which extends out into time beyond view. "Act 2" is all you and I need to know, and once you do, I feel it will colour your view of the 10,000 things that will shake down in "Act 3". You will start to see that what Blondie writes is not poetry and wishful thinking, but actually has a logical basis. But more importantly, you will likely share my great certainty about exactly what you need to do, so that you are ready to cope with whatever comes down the pike exactly in "Act 3" later. Fortunately for us all, in my view of things (others may wish to differentiate their view from mine?) "Act 2" is relatively short and to the point.

"Getting it" has less to do with reading the archives, Desperado, everything to do with ditching your confirmation bias and approaching things impartially.

Personally, I have never read the entire archives of Another, FOA or FOFOA myself.

There is no point in exploring any information with anything less than a fluid point of view.

What I have read has established a perspective for me that has seamlessly (thus far) absorbed or superseded previous perspectives across a broad spectrum of fields. I have found this to be unexpected, but not unwelcome, and in this light made ever mindful that there is always more to discover and an ever more all-encompassing perspective with which to experience it.

Now, I said I don't want to say more words than I feel I have to. So, please take some time to contemplate, in the context of everything you have ever read at this blog, what I have written immediately above after restating your question. I wish you to delineate what I have said there, from what I have written above your restated question, and the things I am saying in this paragraph here and beyond. I say this just so you are very clear indeed that you should focus your effort while reading this comment on this one, single sentence response. You should think also about everything else you have read on this blog as context for that sentence, but I think you will find that sentence is The Money Shot. I hope something comes to you in a ginormous white flash as you ponder it. Ommmmmmm....

OK, so moving on to drive the point home, just one more time... I am also going to now (separately!) resuppply an extract from costata's post above, that I have already highlighted as a critical thought you need to appreciate in order to see the remainder of the whole debate in the Freegold context that costata intended. Here it is again, just for you buddy:

The gold investors also now have some extremely powerful de facto “allies” that the SLA does not. The Central Banks and Treasuries are net gold buyers again. These are fantastic allies to have. They issue their own fiat currencies so there is no objective limit to how high they can bid the price of gold. They can never “run out” of that currency either. They just need sound reasons for bidding for gold and those reasons are the raison d’etre of this blog.

There is a war between two things going on alright. But it's not a war between silver and gold, or you and me for that matter. It's a war between the Dollar and the Euro, the old global monetary system and the new one. Gold is just THE tool.

Now, you can continue to argue about what would be right, or what would be best, or just what you would like to see. But I am only interested in ensuring as many people as possible just look and see what will be, and frankly you are getting in their way so you have to be helped in order to help them.

Wendy: The comment was meant for News Wire. I was basically saying, 'Don't count your chickens before they hatch'. Telling people you have made tons of money on silver only works if you have sold your silver.

Telling people you have made tons of money on silver only works if you have sold your

I don't suppose the same is true for Gold though, eh?

How about if you have swapped your Silver For Gold? and what it is that you mean by 'money'...

Short term Silver, could be very good...Recent (today) James Turk (founder of GoldMoney) statement at KWN Blog: "This time I expect silver will take only several weeks before exceeding $49.78, the 31-year high reached on April 25th. The reason?

As evidenced by silver’s backwardation, which began in January and continues to this day, the demand for physical silver has really accelerated. As a result of last week’s price decline, backwardation has roughly doubled in size. This is clearly a a signal of strong demand for physical silver, and further evidence of a point I have been making for some time, that the paper silver market is losing its significance as a price discovery mechanism."

This video:http://youtu.be/-IiarVvZguYis at odds with many of Costata's stated facts regarding Silver vis-à-vis Gold

@Wendy: Sorry to disappoint you, Wendy. Drunk and stupid came later in the day! :-)

For example, I haven't reposted part 1 of my response to Desperado this morning, because I can see it is just waiting for FOFOA to finish his beauty sleep and click a button for me.

I would like to clarify "my setup", just to allay everyone's twitchy conspiracy radar antennae. I just use Gmail and an Android phone that is on 24x7. The messages here get to my mailbox before they are subsequently redirected into Spam Valley, or before you have a chance to delete and repost. There is nothing sinister, just a quirk of fortune for me. As I said, I can't believe I am the only one, but just the only one that has stated it.

A great tale, thank you.An analogy is to be made on the gold paper market, that interestingly you decided not to enter in:That puts a whole now perspective on the meaning of 'when gold price crashes, the game is off'. Rising price of GLD means the comex can offload some of its bullion reserve, while a falling price would force them to purchase a lot, or end-game the ETF. If the flow is nill, there will be nowhere to purchase from. This is the disconnect point.

Therefore they have all the incentives to push the price slowly but steadily higher. How can you corner that? who is going to sell under these conditions?

A side note: I am following this blog for about 9 months now. during this time frame, there has been an ever stronger follow-up and increase in comments. However, this has also brought some 'stale air', or a sense of animosity that wasn't here just a few months ago. Is it time to moderate, or change the way this blog is set?

I personally could see that silver is just a trade and will always be just a trade. No different then mining stocks, in some cases more so then mining stocks.

Would some mining stocks be better then silver ? I think they would.

FOFOA does not subscribe to the mad max scenario yet he thinks all mining stocks will go to zero. I don't see history baring that out.In Germany, Siemens stock survived 2 world wars and 1 hyperinflation.

In terms of real estate, what is everyone's opinion with regard to owning or renting with the upcoming financial global restructure? Which is better? If you own a home with a mortgage should you be selling now and renting?

gary: I used the word 'money' on purpose to describe "News Wires" thought process. Thanks to FOFOA and The Gang the word 'money' no longer has any real meaning for me. Value I understand. Fiat I understand. Money is now an ambiguous word.

"I don't suppose the same is true for Gold though, eh?" No it is not. Gold is the final destination and as it has been said before (but I will change it slightly), If you understand anything about Freegold you will hold your value until after the transition so there is a point where I would go hungry (meaning eating beans and rice for a month if it meant holding onto one ounce of gold). I hold gold for a specific reason and for a specific time.

I was going to ask you why you hold silver but you answered my question, "Short term Silver, could be very good... That is the voice of an investor.

I don't consider myself a gold or silver bug (even if people around me might). For the moment I am heavier on silver than gold (both in paper and physical) and view silver more on the 'short' term (1 or 2 years). I understand/believe in gold as a focal point for wealth preservation, although silver might also have a certain monetary value.

One point you did not address was the difficulty Sprott faced when collecting the silver for PSLV. The 'conspiracy' answer could be of course he had it, but just delayed the publication of the bar list to push the demand for PSLV.

I don't consider myself a gold or silver bug (even if people around me might). For the moment I am heavier on silver than gold (both in paper and physical) and view silver more on the 'short' term (1 or 2 years). I understand/believe in gold as a focal point for wealth preservation, although silver might also have a certain monetary value.

One point you did not address was the difficulty Sprott faced when collecting the silver for PSLV. The 'conspiracy' answer could be of course he had it, but just delayed the publication of the bar list to push the demand for PSLV.

There is a strange cult-like attitude here. I agree with the vast majority of what I read here, and really appreciate the perspective offered, but this blog suffers worse from groupthink than just about any other I've ever read.

I have noticed that this blog operates on two distinct levels, with different levels of consensus, or groupthink, if you like.

1) People who have put a lot of time and effort into research all roundly reject the weak ideas, parroted from a pastiche of leading voices in the alternative finance blogosphere. These voices often use the same tired terminology and phraseology of popular gurus in the area when commenting on the blog. There is consensus and groupthink within these people.Many of the regular FOFOA posters roundly reject these regurgitated views, every time they raise their heads.

2)The second level of the blog is between the more seasoned posters where there is much reasoned and thoughtful discussion, often expressing differing viewpoints, garnered from their own research, knowledge, experience and deductions.

Those coming to the blog at level 1 often have exactly the same prejudiced views - they appear threatened by a framework that contradicts their investment decisions, political decisions and general worldview.

Fiat or paper currency causes economic apartheid and hyperinflation (and eventually social conflict, warfare and bloodshed). This is why:

WHO issues and controls fiat currency? NOT you and I. WHO pays basically NOTHING for fiat currency and creates it out of thin air to bid for all the goods and services available on the planet? NOT you and I. WHO has to work their asses off in order to obtain some of that worthless "medium of exchange" so that they can pay for food and shelter?

YOU and I.

FREEGOLDERS are saying that fiat currency is the BEST form of money = FREEGOLDERS are fomenting economic injustice and political turmoil.

radix46 & MH: The concept of 'Group Think' is appropriate, except, how do you become part of the group? I didn't just show up, listen to FOFOA, Blondie and others for a single day and jump in! I started with my own prejudices and past experiences but no one was going to force me or 'group think' me into making the largest financial decision of my life. I watched from the sideline for months afraid to raise my hand because of the vastly superior level of discussion that I was exposed to. I was learning.

I'm still learning but until someone shows me something that makes more sense than FOFOA's Inverted Pyramid I will comfortably sit not watching the price of any metal.

So, now that I am not investing I can relax and enjoy life, and now that you mention it, I guess I can be part of the 'group think' if the definition is 'a group of people who are so comfortable in their choices that they, as a group, want to help others achieve this same feeling through sharing. There in no way anyone can say that DP isn't trying to help Desperado (and by extension all the other silent silver readers) so if the group think is to spread the word of Freegold... Check the sign on the door.

Group Think... That's going to make me smile all day:) Why? Because, if you really, really look around the internet for superior economic conversation this is the group and I'm glad I found what they are thinking! Thanks Everyone!

Trichet (or perhaps Draghi?): "We, the executive board of the ECB, have decided to bolster the gold reserve of the euro system and to publicly emphasize the importance that we ascribe to gold as a reserve of the euro system. We therefore propose to purchase gold bullion at the price of EUR 30000 per ounce."

"To the casual observer, this price may seem to be unrealistically high. It is not. Let me explain. Although gold bullion at the retail level as well as gold denominated financial products presently trade at about 1100 EUR per ounce, the big quantities that are traded among central banks and large international organizations, have always been priced at a substantial premium. This is simply because the quantities traded are very large compared to the annual mine supply and to the quantities of physical gold that are traded. This is similar to the block trades in equities that all ofyou are familiar with. In fact, last year, the central bank of India purchased gold bullion from the IMF at 25000 euros per ounce, a roughly comparable price."

"[...]"

"The announced gold open market operations of the euro system will commence on market opening in Zurich and London this coming Monday morning and will be conducted by UBS and Deutsche Bank on behalf of the member banks of the euro system. For details, please refer to the written announcement distributed after this press conference."

ART:This is a snippet I found useful in getting my head around how people here use the word 'money'. There is more to the post I got this from, and it gave me a solid Aha! moment...

From, I think, FOA:----- The use of physical gold in trade is not the use of money in trade. We do not spend or trade a money unit, like the dollar, to define the value of gold and goods: we barter both goods and gold to define the worth of that trade as a remembered association to the dollar money unit. That remembered worth, that value, is not an actual physical thing. A dollar bill nor an ounce of legal tender gold represent money in physical form. Money is a remembered value relationship we assign to any usable money unit. The worth of a money unit is an endless mental computation of countless barter trades done around the world. Money is a remembered value, a concept, that we use to judge physical trading value. -----

In (more or less) the terminology of the people here who best understand Freegold (and that definitely doesn't include me), gold is the very best way to store value; paper currencies will be very useful as a way to exchange value; and *fiat* currencies will be going the way of the dodo once Freegold happens and people start valuing all currencies against gold i.e. once gold becomes the Reference Point. Nobody will place much or any value on notes from a regime they know is printing currency or allowing fractional reserve banking.

I hope this is helpful. I think you're getting the wrong idea about some of the best stuff that's written here. I think all of the most 'senior' commenters here would agree that *fiat* currencies have been used nasty purposes for a long time. When they talk about paper money, I think they're talking about notes valued with respect to gold and used for every day transactions e.g. everyone will be checking how much gold a US$100 note is worth today and thus establishing its true purchasing power before accepting or spending it.

Does the term "fiat" even technically apply in a freegold environment?

Yes, it is still paper that is not pegged directly to anything of value. However, it is still "backed" in an abstract way by gold. The paper currency (in FG) is only used to lubricate and move to facilitate trade of goods and services. The gold(store of excess work) is still backing the currency. If countries' print too much currency, the value of the gold in their "zone" will decrease and be grabbed-up by others in a "zone" with a more stable economic strategy. This is like a natural deterrent against the printing of too much currency. Go print-crazy and watch the real value move out of your economic zone. A natural balance?

Or do I have this wrong?

BTW... Thanks, Costata, for throwing your thoughts out there on the silver issues.

"This is to report on the progress of the recent negotiations betweenthe governments of Argentina, Chile, Peru, Bolivia, and Mexico. We have reached the conclusion that our resource based economies need to be supported by a sound monetary regime."

"Internally, this will be achieved by bringing silver coinage in circulation in denominations of 0.1oz, 0.2oz, 0.5oz and 1.0oz. These coins will have their fine weight stamped in, but not carry any currency denomination. Their monetary value will rather be determined by our central bank as follows. Initially, it will be the market value of their silver in local currency, rounded up to the nearest peso. At the last working day of every month, the value will be adjusted as follows. If the market value of the silver has increased, its monetary value will be adjusted to that value, rounded up to the nearest peso, effective the next day. If the market value has declined, their value is unchanged. Foreign individuals and foreign entities are allowed to hold these coins."

"In international trade, the new monetary regime will be reflected as follows. It is illegal for foreign entities to sell or market any natural resources derived domestically, in effect from the first day of the next month. Foreign companies are encouraged, however, to set up domestic subsidiaries in order to continue their operations."

"All revenue derived from the extraction of natural resources belong to the people and will be sold by the ministry of natural resources. The ministry will, however, pay the extracting companies royalties at a rate of 20% of their sales, payable in local currency."

"All natural resources will be sold either for local currency according to the prevailing market price which the buyer is invited to acquire in the FOREX market as usual. Alternatively, natural resources are sold for silver coin or bullion, physically delivered. Initially, payment in silver will be accepted at the following rates: 1 ounce of silver per 5 barrels or crude oil; 1 ounce of silver per 50 dry metric tonnes of iron ore; ..."

and here is he insult:

"... 10 ounces of silver per 1 ounce of gold. Silver, obviously, will be sold only for local currency. The rates will be reviewed and may be adjusted six months today."

This one would fly and corner the market for physical silver very nicely. If Costata sill has some silver, he could then purchase more physical gold at the new GSR of 10:1. You see, the real world always offers more than one possibility.

do you, with your last post and the one above (about ECB and gold at 30.000) imply that the "South American" solution would work because you get something of value for your silver and for gold at 30.000 EUR you only get... well... EUR?

Been reading this blog for months, and I am getting closer to the Freegold concept, but still have some doubts on silver.

1) What is your opinion please on the mathematical demonstration that Adrian Douglas did about the London manipulation of gold prices between the am and pm fixes? it sounds pretty true to me... so there has been price supression somewhere sometime...

2) If there is so much silver as Moriarty and others proclaim, and more to be mined, why silver could not be devoted in part to industrial uses (some industries will substitute silver on account of a high future price, but others like the bactericide applications, won't be able to), and another part to go hand in hand with gold as a medium of exchange? it seems to me that Hugo Salinas makes good sense.

Your Euro repricing of gold scenario is DOA, but not necessarily a reval of gold. Equally, your silver scenario also seems quite fanciful. I'll give you a hint: It's a three letter word that's in your post that stands for something the world can't do without.

"D.: Thanks Victor and very true about Another and Foa. Now they will probably tell you that you just don't get it because you haven't spent enough time studying the archives."

[mrt: It is not about archives but rather logic and connecting certain dots, I offered you a clear starting point "CB hold now monetary gold as a wealth reserve asset", That is Freegold in doing... Also, Perhaps you are not happy that Switzerland is loosing part of its "safe heaven" status, in FG this well positioning monopolistic behavior/by tradition_design_however/wealth concentration is not possible, capital-wealth (gold) flows where productivity/productions is not where it is best for it to be stored (as now, look China and India Giants are buying). Not all things are ok now not all things will be ok later, we are not pacifists nor idealists, I do not like present system, I see problems with the future one as well. Who am I to judge anyway with my limited view of what is not/good and what is right, those Indians, Chinese people are IMO doing better now in sum? Let me offer you then another view]

http://www.goldsubject.com/

"...The purpose of a good blog is to expose people to information that is new to them (even if not new in the absolute sense), so that they can do THEIR OWN thinking and make up their OWN mind. I hope this blog does that for you...."

[mrt: IMO very well articulated-interlinked ideas, perhaps this form is easier/more accessible for you? Note: I am not trying to convert you just trying to open real factual dialog, please let me know issues which you do not agree under particular articles and lets discuss]

http://www.goldsubject.com/my-best-work/

#Gold Subject writes:

"collection of my personal favorites.

1. The Economic Meltdown FAQ

2. The inevitable default of all fiat money and paper assets

3. Freegold theory — the massive future revaluation of gold

4. Wealth destruction

5. Inflation and deflation go hand in hand

6. Gold is valuable to everyone, everywhere, all the time

7. Fiat money is for the confiscation of the people’s wealth

8. The bitter irony of quantitative easing

9. The enlightened and the clueless

10. Thoughts on silver as a store of value

11. Wealth creation and Keynesian economics: chemistry and alchemy

12. Buy gold and withdraw your support of the system

13. Banks are in the business of getting people into debt

14. Good deflation vs. bad deflation

15. Currencies should be backed by the issuing nation’s productivity"

[mrt: ...there is much more and sorry I will use the word, in "GS archives" :o) no offense, looking forward to learn from you, please post also some links supporting/backing your view for deeper insight.] -

* "Do all fiat currencies collapse including the Euro, or just the dollar?"... How many currency collapses were you in in your life? Lets define our terms for better understanding first.

* "capital controls"... IMO atm it seems rather the IMFs issue (USA and UK - see my comment few posts ago) in comparison to one pillar of EU which is a Free internal movement of capital.

I see we were writing at almost the same time, I didn't see your post. I too was speaking to the Art-like folks of the world:) (No offense to them at all) But I wanted to make sure I had it mostly right.

---

I could see why Central/South American countries would like to use silver... They have massive reserves. It's a shame silver is more useful as a commodity due to its own nature and physical properties;) Good thing they have gold, as well.

> the "South American" solution would work because you get something of value for your silver and for gold at 30.000 EUR you only get... well... EUR?

Of course, gentlemen.

Why don't you think it through what would happen when the ECB does it. There is a lot of gold held as investment in order to preserve value in real terms (as opposed to religious motives which one might suspect if one reads too much in the comment section here).

Now if you have gold and they offer 30k euros per ounce given today's purchasing power of the euro, what would you do? You think for a minute. Well, if other people trade their gold for euros, what would they do with these euros? Purchase Greek and Irish government bonds? No. If they have gold today, they are probably not that stupid.

Purchase German government bonds? No. This would defeat the purpose for which they are presently holding gold. Purchase any fixed interest or debt instrument? No. But what then? Other real assets, of course: stocks, shares in privately held companies, farm land, stockpiles of natural resources, and so on.

How long would this go on? Until the purchase power of the euro (being printed for gold) has adjusted so much that there is no longer any trade-off. How long is that? Until the purchase power of the euro compared with real assets has declined by a factor of 27 (just as the nominal price of gold has increased).

So, yes, the ECB can pull this at any time. But the major effect (besides trashing some London based banks) would be the instant destruction of the euro. A certain skyscraper in Frankfurt will then be raided by the mob. No, this one is a non-starter.

BTW: there should be "that" conference today :o) so lets look what it brings.

"SNB and IMF to host High-Level Conference on the International Monetary SystemThe Swiss National Bank (SNB) and the International Monetary Fund (IMF) today announced that they will jointly host a second High-Level Conference on the International Monetary System. The conference will take place in Zurich on 10 May 2011.

This conference will contribute to the ongoing debate about the reform of the international monetary system. The main topics include policy discipline and spillovers in a global economy, global liquidity provision at times of crisis, capital flows, and international reserve currencies.The conference will bring together a group of high-level participants, including central bank governors, other senior policymakers, leading academics and commentators. It will be co-hosted by SNB Governor Philipp Hildebrand and IMF Managing Director Dominique Strauss-Kahn. The keynote speech at lunch will be given by Christine Lagarde, French Minister for Economy, Finance and Industry."

"Profits and losses of the Swiss National BankAt the end of 2010, the currency reserves – foreign exchange and gold – amounted to more than CHF 250 billion. Bearing this sum in mind, it becomes clear that even a slight percentage change in value leads to valuation gains or losses amounting to billions of francs. These effects can be mitigated to a certain extent by investment policy, including consistent diversification of the foreign exchange reserves. For instance, over ten years there has never been a negative return on the foreign exchange reserves if the changes in the value of the Swiss franc are excluded. However, diversification cannot prevent losses if the Swiss franc appreciates against practically all other investment currencies. And this is exactly what happened to a significant extent last year. The risk, moreover, is not new. There have regularly been periods in the past that saw a strong rise in the Swiss franc.Even if making a profit is not the objective of the Swiss National Bank, we may still build on the assumption that the SNB does achieve positive returns. Not every single year, but on a long-term average. Interest income, dividends and price gains on investments all contribute to these returns. On average, they exceed the exchange rate losses resulting from the Swiss franc’s long-term upward trend."

FREEGOLDER SAYS: "The use of physical gold in trade is not the use of money in trade. We do not spend or trade a money unit, like the dollar, to define the value of gold and goods: we barter both goods and gold to define the worth of that trade as a remembered association to the dollar money unit."

I SAY: LIES! We don't (and we CAN'T) trade goods just for the purposes of defining their value in fiat currency which is itself UNDEFINED to begin with! This is pure gibberish to intellectually beat you into submission to their bankers' schemes. You'd have to be INSANE to engage in a trade just so as to discover the value of the things you're trading against something that has NO value (fiat money)! It can't be done even if you wanted to! Real money is commodity money like gold and silver which themselves are traded against other commodities.

FREEGOLDER SAYS: "...paper currencies will be very useful as a way to exchange value; and *fiat* currencies will be going the way of the dodo once Freegold happens and people start valuing all currencies against gold i.e. once gold becomes the Reference Point."

I SAY: LIES! fiat and paper currencies are the SAME thing! Fiat or paper currencies are not valued against gold UNLESS they are backed by gold and redeemable in gold, as in gold certificates. What's wrong with you? What Freegolders are selling you is what you already have NOW!

FREEGOLDER SAYS: "Nobody will place much or any value on notes from a regime they know is printing currency or allowing fractional reserve banking."

I SAY: So WHY promote such a system if it's a bad thing? Are you insane?

> What do you think will happen when you overvalue silver? How long will Peru deliver gold for silver? Which way will gold flow?

Confirmation bias.

Gold would flow from Latin America to the rest of the world - at least the running mine production. Costata would be happy. But the South Americans would give a sh*t about which way gold flows and rather care about which way silver flows.

Should Costata like Argentinian beef steak, he may be well advised to keep some silver in order to pay for the treat. Likewise if he needs iron ore from Chile for his business or if he lives in the US and needs to refuel his SUV using Mexican oil. Beware if Brazil joins the new alliance.

Edwardo said...

> I'll give you a hint: It's a three letter word that's in your post that stands for something the world can't do without.

I say: I don't need your hint. But you seem to be in need of one. Here is the hint: Think about trade balances and which products the mentioned countries export, in particular to the US and to China.

Jeff said,

> Yes, oil can simply decline the offer.

How would oil decline the offer? I hope I listened to the Mexican finance minister carefully enough. He did not mention that Mexico was bidding for oil. But he offered to sell the Mexican oil for payment in silver.

> Everyone else with silver will rush to dump it on latin america at the value of $3000 per oz! That silver standard won't last long.

Good idea. In his press conference above, the Mexican finance minister forgot to mention that they would also sell their US dollar reserve for silver. The price you are mentioning price might do, but he would probably go for 100$ per ounce for a start. This would be enough to get silver moving.

If you wish to understand whether the new silver standard would work, think about trade flows and trade balances. Think about how much silver is there, how much is mined and recycled every year, how much of what stuff the counties mentioned above export and to whom. You should be able to figure it out without any further help from me. And beware if Brazil joins.

YOU SAID: "Art, can you please clarify, WHOSE fiat currency are Freegolders claiming is the best, and HOW is this relative superiority of fiat measured?"

ANSWER: Since the start of this Freegold nonsense with Another, Freegolders touted the Euro as a superior currency because the ECB marks to market their (equally inscrutable) gold reserves even though the Euro is NOT backed by gold nor redeemable in gold.

The same international bankers are behind the Euro AND the US dollar. It's just another arbitrage opportunity for them to cover up the fact that they're printing money out of thin air, by dissimulating it as the proceeds of currency trading profits: the bankers simply take position before a currency market moving piece of news is announced which they themselves caused to begin with. It's just another form of money printing. Real insider trading at its greatest.

...Freegolders are allowed to impose fiat or paper as money then they can print as much of it as they like and buy YOUR gold at basically no cost to them.

YOU...

...on the other hand, CAN'T print fiat or paper currency to buy gold; you have to WORK for paper money. So you will have to work more and more to buy LESS and LESS gold which will go up in price due to monetary inflation.

Silver is a great monetary metal. It is way underpriced relative to gold when the true rarity of silver (gold is only about 10 times scarcer than silver) and the scarcity of above-ground supplies are taken into account.

@Art: I actually do not know where to start with your statements... I will opt to not comment on those but let me state You seem to be a Hard money advocate not fully understanding problems of past gold or bi-metal standards and you seem not offering any new ideas about world trade and monetary system which could work locally & globally and will not lead to what we already went through in past. (It has been stated by many, and I put many quotes here, that there is no way that we will be returning there). I have a feeling that your research in monetary past was not very deep (and I am not mentioning another, Foa archives).For the beginning I would recommend you to check few books, research papers articles about the post WWII situation and proposals before the BW system.Very good would be also to read a little about the history of pre-OPEC during that time.

I think if you get/find this statement you will see a little further in your view:

"Blondie said...

My timeline starts a bit earlier than yours... I think 1694 is a key date, but not the only one. Everything Freegold is tied up with the current system and its misappropriation of value, and this began (again) with the creation of the Bank and debt as money. Seed is sown."

It is about WHERE are Your savings allocated. In debt or in equity (is saving to be speculated with or be still)?

Due to system and structure IMFs core states are not able to create much of its own savings anymore which are not sucked into dollar derivatives and dispersed. On the top of that sucks savings of other nations into something of losing value and denies them grow from internal investment. Meanwhile IMF was declining the possibility for nations to save in gold. That changed with WGA. Got it?

"IM P R O V I N G T H E A L L O C AT I O N O F D O M E S T I C S A V I N G S F O R E C O N O MI C D E V E L O P ME N TIt is no surprise that considerable attention has been given to Chile’s “golden age”. The impressive boost in growth rates, accompanied by a similar increase in saving and investment rates, has been widely studied, among others by Gallego and Loayza (2002), Beyer and Vergara (2002), Chumacero and Fuentes (2002), and Schmidt-Hebbel (2002), among others. While the average growth rate rose from a low 2.0% in 1975-85 to 7.7% in 1986-97, the gross national saving rate jumped from 9.6% to 20.8%, with the gross domestic investment rate also increasing from 16% to 24%.One fact noted by most authors is that factor accumulation only provides a partial explanation for Chile’s economic expansion. The increase in capital and employment is unable, under a Cobb-Douglas production, to explain the magnitude of the country’s growth jump. Indeed, and as reflected in Table 2, a simple growth accounting exercise suggests that the increase in the growth rate was accompanied by a significant increase in total factor productivity.Rather unsurprisingly, the behavior of saving and investment has been highly procyclical. Positive, significant correlations exist between the growth rate and the evolution of both saving and investment rates..."

You seem to be an expert on oil extraction. Well, as such you can perhaps list all those middle eastern oil fields that are not beyond their peak production and that are not in terminal decline.

I promise I will listen to you. But you better research carefully and get the facts right.

If you still don't like the proposal, you are welcome to include Brazil in the new alliance. Perhaps I should have included it right from the start in order to avoid this sort of attack on a straw man.

Anyway, if you think carefully about it, I am sure you will be able to figure it out.

There IS an important difference between the way paper currency operates now, and paper currency will work after Freegold. In fact, that's the 'reference' part of 'reference point gold'. Right now, countries and banks are pumping out paper, taxing everyday people through inflation and creating distortion through easy credit etc etc. I think you'll agree with that point? After Freegold, paper currency will still exist but everyone will use GOLD as the reference point to determine the value of a given quantity of paper currency from a given country. Freegold isn't about forcing people to accept ANYTHING, let alone paper currency. Part of the Freegold thesis, though, is that paper currency will perform a useful function as a means of exchanging value.

Here's an imperfect and limited example:Let's say that, Post-Freegold, I am in the United States and want to sell my car. I consider its utility to me to be equivalent to the value stored in (say) an ounce of gold. I look at the purchasing power of the American dollar on that day, see that $20000 are required to purchase one ounce of gold, and so I set the price as $20000. I still haven't sold it by the next week, and in the meantime the American government does something stupid in the management of its currency e.g. tried some quantitative easing. The market has responded and devalued the USD even further against the gold reference point, so now $50000 US dollars are required to purchase an ounce of gold. My asking price is now $50000.

Can you see how this is less susceptible to government / bank chicanery than a gold standard? If it were mandated that $1000 buys an ounce of gold, then how would the market be able to respond to further debasement of the currency? In a Freegold environment, gold is the reference point and the lack of a fixed gold standard is a great strength, allowing proper assessment of a currency relative to gold.

The FOA quote above was partial, and I lifted it from here:http://fofoa.blogspot.com/2009/12/gold-ultimate-wealth-reserve.html

Here is more of the quote:Most contemporary Western thought is centered around gold being money. That is; gold inherently has a money use or money function; built into it as part of the original creation. This thought presents a picture of ancient man grasping a nugget of gold, found on the ground, and understanding immediately that this is a defined "medium of exchange"; money to buy something with. This simple picture and analysis mostly grew in concept during the banking renaissance of the middle ages and is used to bastardize the gold story to this day. Even the term "money", as it is used in modern Bible interpretations, is convoluted to fit our current understandings.

[...]

In ancient times there was no concept of money as we know it today. Let me emphasize; "as we perceive money today". Back then, anywhere and everywhere, all things known to people were in physical form. All trade and commerce was physical and direct; barter was how all trade was done.

If one brought a cart to market, loaded with 20 bowls and 20 gold nuggets, he used those physical items to trade for other valued goods. The bowls and gold had different tradable value; as did every other thing at the market. Indeed, gold brought more in trade than bowls. Also true; if a barrel of olive oil was in short supply, it might bring even more in trade than all the gold in the market square.

The understanding we reach for here is that nothing at the market place was seen as a defined money value. All goods were seen simply as tradable, barterable items. Gold included. Truly, in time, some items found favor for their unique divisible value, greater worth and ease of transport. Gems, gold, silver and copper among others, all fit this description. These items especially, and more so gold, became the most tradable, barterable goods and began to exclusively fill that function.

But the main question is: was there money in that market place? Sure, but it was not in physical form. Money, back then and today, was a remembered value in the minds of men. Cumbersome it may have been, but even back then primitive man had an awesome brain and could retain the memory values of thousands of trades. In every case, able to recall the approximate per item value of each thing traded. That value, on the brain, was the money concept we use today.

Eventually gold climbed to the top of in the most tradable good category. Was gold a medium of exchange? Yes, but to their own degree, so were the bowls. Was gold a store of value? Yes, but to a degree, so were dinner plates. Was gold divisible into equal lesser parts to define lesser barter units? Yes, but to a degree one could make and trade smaller drinking cups and lesser vessels of oil. Perhaps gold became the most favored tradable good because the shear number of goods for good traded made a better imprint on ones memory; the worth of a chunk of gold in trade became the value money unit stored in the brain.

Seeing all of this in our modern basic applications of "money concept", almost every physical item that naturally existed or was produced then also held, to a lesser degree, gold's value in market barter. But most of us would have a hard time remembering a bowls value and thinking of a bowl as money. The reason this is such a stretch for the modern imagination is because bowls, like physical gold, never contained or were used in our "concept of money". Back then, as also today, all physical items are simple barterable, tradable goods; not of the money concept itself. Their remembered tradable value was the money.

Money, or better said "the money concept", and all physical goods occupy two distinct positions in our universe of commerce and trade. They have an arms length relationship with each other, but reside on different sides of the fence and in different portions of the brain.

For example: say I take a bowl to the mint and place an official government money stamp on the underside. The bowl now is stamped at $1.00. Then I take one tiny piece of gold to the mint; one 290th of an ounce or at today's market a dollar's worth. They stamp that gold as $1.00. Whichphysical item would be money? Answer; neither.

Using ancient historic reasoning and the logic of a simple life; the bowl could be taken to the market square and bartered for another good. Perhaps a dinner plate. In that barter trade, we would most likely reach an understanding; that the "bowl for plate trade" imprinted our memory with what a digital, numeric dollar concept is worth. Again, the 1.00 unit was only stamped on the bottom for reference. While the dollar concept is only a rateable unit number to compare value to; like saying a painting is rated from one to ten when judging appearance.

We could do the exact same thing without 1/ 290th ounce piece of gold as with the bowl above. In the process we again would walk away with the knowledge of what a $1.00 unit of money value was worth in trade. The physical gold itself was not the money in trade; the value of the barter itself created the actual money value relationship.

Does that make any sense to you?

For me it made a little lightbulb go off, and I finally understood some of the previously crazy-sounding comments here about money and what it is and isn't.

IMVHO Desperado has made a sound argument here within a specific context ie. his view of likely future events. The only part I would disagree with is the implication that others here are naive in the second last sentence.

"If freegold works out the way you so strongly believe and all other PM's drop to their industrial scrap value, I will certainly be okay.(Me: Unlike Bix Weir's followers.)If however events unfold in a fashion that prevents freegold in the region where we live and possibly makes gold go into hiding and silver becomes king, even for a few years, I will also be able to survive the drought. In fact, if silver wins for even a few years, I might even better off than a direct shot from HI to freegold. In this scenario you could be forced to offload your gold to raise silver at 5:1 or even an inverse ratio, whereas I could sit on my gold and use my silver to get me through the drought. In fact, the mere spending of your gold in an illegal black market could end up causing you to land in jail or in a gulag because the giants turned out to be less benevolent than you are so certain freegold will force them to be. In this scenario my stash of 90% pre '66 francs could conceivable allow me to live very well until the counter-revolution."

A euro freegold bid won't occur until dollar HI is underway. It also won't cause every gold holder to sell their gold, it will only establish a flow. You seem to think gold holders will rush to dump their gold (which is greatly increased in value) for currency which they then must trade for another real asset. Why will they dump the best wealth reserve? In fact some people will be buying gold at this time. Also, other nations will match the freegold bid. 30k euros may be only the start, and the price may go higher. It's a floating price.

I don't think your latin countries will be happy with their deal. I think they will wind up with a lot of silver and no gold.

If you want to understand freegold, think about stocks and flows Victor. I hope you get it.

Thank you. I commend that article of Murray Pollitt to you (on mining costs) that I linked in the post. If the 'boyz' don't allow gold to move up into the next trading range soonish I think there will be trouble a' brewin.

There is a difference between promoting an economic system and witnessing the unfolding of one.

You’re generalization with regards to how a ‘freegolder’ may think and, more importantly feel, displays an arrogance befitting of a troll.

If there were a classification that I would place a ‘freegolder’ in, it would be in a classification of realists – for they can clearly see the emperor has not cloths.

It may be a better use of your time to show – why – a freegold system is not unfolding.

My fellow Advocates,

Always remember that the banker’s number one goal is to keep confidence high in their currency. Without confidence, their currency doesn’t function. A Freegold advocate understands the utility of currency without falling victim to the indentured nature of the debt!

It will be you (the little guys of the world) that will reestablish the term ‘precious’ to gold!

Yes, that's right VTC, I'm an expert on oil. In the meantime your sarcasm, mixed with a soupçon of menace, VTC was a well chosen moniker indeed, will get you nowhere. Of course ME fields of great repute like Burgan, and the biggest of them all, Ghawar, are likely in terminal decline as well. However, neither Mexico nor Venezuela have ever been swing producers like SA.

Timely...Silver-Backer Sprott Still Believes -- DeeplyBy Carolyn CuiThe Wall Street JournalMonday, May 9, 2011http://blogs.wsj.com/marketbeat/2011/05/09/silver-backer-sprott-still-be...After silver suffered its worst one-week drubbing in three decades, one of the biggest silver bulls gave a pep talk to hundreds of followers on Monday."Silver will be a currency just like gold. It's logical to expect silver prices to go much higher," said Eric Sprott, chief executive officer of Sprott Asset Management LP, which oversees a $1-billion silver fund that was $327 million larger at the beginning of last week.As for the recent plunge, Mr. Sprott pointed at speculative short-sellers as the prime culprit, eliciting applause from the crowd of nervous believers. Silver skidded 27% last week, but poor man's gold leaped 5.2% today, underscoring its rodeo-like allure.Mr. Sprott, a big advocate for precious metals, trotted out familiar themes to back up his points: the Federal Reserve's loose monetary policies, relentless bank failures, and the fragile housing market.

I should have mentioned this before. I'm not ignoring your arguments. As I work my way through the other comments I have been collecting yours with the aim of making a more detailed response than my first quip about Blondie's retort.

thank you Costata for saying what needs to be said more on the internet about what the silver market and that it's not all cosnpiacies and trapped shorts. It's naive for people to base their investment lives on some of the rumours purported as facts. I watched with great trepidation the newbies jumping into investment vehicles they little understood thinking silver was going straight to the moon.

I subscribe to The Metal Augmenter Tom Czabo's newsletter and I've done very well by it and appreciate the sound advice and often timely calls.I don't believe a bi metallic standard can work. Silver's dual usage will mean it's value will be very volatile vs. gold and barter value, but I think it's apparent that if the fiat systems collapse people will be looking for more than just gold to use as a store of value and unit of exchange. Oil, salt and food come to mind but not practical. the "people" may very well turn to silver and in addition to LatAm Malaysia and Indonesia are using it now to provide their people with a "real" store of value. There will be a demand for silver and one should own some. I own a lot but I hope to own more gold and that the opportunity to exchange at even more favorable rates continues for awhile.I have one question. If gold goes to 50k or whatever will that not result in one of the greatest transfers of wealth to an unintended benficiary ever? I'm thinking of those Indian housewives wearing like 20,000 tons(?) of gold.Or will there be a way to relieve them of their gold before that happens?

and regarding Bix Weir... I would suggest stopping referencing him as some icon of Silver knowledge. IMO - he is a joke - a once UFO enthusiast who simply tells Silver Bugs what they want to hear in hopes they subscribe to his $ newsletter. Using him is hardly a viable point to be contrary. There are plenty of strong analsyts out there - more forbidable foes than Mr. Weir or R. Kiyosaki. Maybe try Dr. Marc Faber, Dr. Jim Willie, Billionaire's Sprott, Jim Rogers, Rick Rule... all of who are also into Gold.

WHO sets the purchasing value of any fiat currency on any given day under Freegold?

You and I? (If yes, how?}

Or the very same bankers who are printing money now?

Who is behind Kitco, INO, Thebulliondesk, etc.? Who inputs those quoted gold and silver prices?

Not you nor I...

AS LONG AS gold and silver are NOT money, their price will be set by the man who can bid higher than you in paper money - and those are by definition the bankers who can create paper money out of thin air.

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